UK digital services tax raises £360m from Apple and others

The British government stated that the British Digital Service Tax (DST) raised 360 million pounds in the first year, of which 90% came from five technology giants, known to include Apple. DST imposes a 2% tax on gross income earned in the UK, which is designed to partly combat tax avoidance measures by Apple and other companies to channel UK profits to low-tax regions such as Ireland. Other businesses that pay DST include Amazon, Google, and Facebook.

There have long been complaints that U.S. tech giants pay too little tax in European countries. A common strategy employed by companies such as Apple and Google is to set up a European headquarters in Ireland, where sales taxes are much lower, and declare that all profits from sales in Europe are made by that headquarters, rather than in individual countries such as the UK. This means they are largely dodging corporate tax, which is levied on profits rather than revenue.

This of course led to a court battle between the EU and the Irish government, in which Ireland is accused of offering favorable taxes to companies like Apple to lure them to the country. Under EU law, it is illegal for member states to offer companies preferential taxation. If Ireland loses the case, it will have to collect $15.8 billion in underpaid taxes from Apple. In the end, however, Ireland won, meaning Apple didn't have to pay.

UK Digital Services Tax (DST)

Some European countries have decided to address at least some of the problems by imposing taxes on tech giants based on income generated in the country rather than declared profits. This means that no matter where these companies choose to funnel their profits, they pay at least some tax in the country where they earn their profits.

France was the first country to announce a tech tax of 3% of revenue, and the UK is following suit. DST in the UK came into effect in 2020.

We say partially because DST, as the name suggests, only applies to the sale of digital products, not physical products. In Apple's case, that means the company only pays a 2% tax in the UK on revenue from things like the App Store and services like iCloud, Apple Music, and Apple TV+.

DST was estimated to have raised £275m in its first year, but the Guardian reported that strong sales of apps and other forms of entertainment during the pandemic saw it actually raise £360m.

Tax due in 2024

DST is a temporary tax measure, applicable only for 2020-2023. From 2024, a global tax agreement is expected to come into force, which will ensure that all companies pay their fair share of taxes in each country in which they operate. It has long been recognized that the practice of individual countries taxing foreign companies is unsustainable. Different tax rates will still have tech giants hunting around for countries with the lowest rates, while countries that impose taxes like DST risk retaliation with tariffs on their exports.

The only real solution is a consistent global agreement on the tax treatment of companies in every market in which they operate, meaning all companies and countries will operate on a level playing field. Back in 2019, the Organization for Economic Co-operation and Development (OECD) announced plans for such an agreement. Work on the agreement began in 2020, with 137 countries participating, and the new tax regime is expected to be implemented in 2024. Apple CEO Tim Cook expressed support for the OECD's plan. While that might increase the company's tax bill, it would at least simplify things and would eliminate a growing PR problem.