The UK last year launched a 2% digital services tax on sales by search engines, social media services and online marketplaces, which netted the Treasury £300m in the 2020/21 financial year.
That was a response to concerns that multinational tech giants making money in the UK were shifting their profits overseas where they could be taxed at lower rates.
Chancellor Rishi Sunak said revenue to fund public services would be protected
But the government said at the time that it would scrap the tax once a global solution was in place.
Under a deal agreed by 136 countries earlier this month, expected to come into force in 2023, the largest and most profitable multinationals will be expected to pay a “fair share” of tax in the markets where they do business and not just where they have their headquarters.
The rules will apply to any firm with a profit margin above 10%.
A quarter of any profit made above that margin will be reallocated and subject to taxes where they operate.
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In a separate measure, G7 nations have also this year agreed to a global minimum corporation tax of 15%.
The government’s latest announcement sets out how it will switch over from the digital services tax to the new system.
Treasury building in London
The Treasury said it had always planned to remove the tax in favour of a global solution
It comes after the UK reached agreement on the transition with the United States and a number of European countries – and means that Washington will not levy threatened tariffs over the imposition of the digital tax by those governments.
Under the deal, Britain will keep the revenue raised under the digital services tax (DST) until the new system, known as “Pillar One”, comes into effect.
Once that happens, firm will be able to claim back – as credit against future bills – any difference between the tax they have been paying under the DST and what they would have paid under the new system, from January 2022.
The Treasury said: “This means that the UK will not lose out on tax revenue in the transition period, as for each business, the UK either retains the amount raised that Pillar One would have delivered if it had been in place originally, or the total revenue from our DST.
“The DST will then be removed in favour of the global solution, which was always the UK’s intention.”
Earlier this year, budget documents forecast that the digital services tax would raise £300m in its first year and another £400m in 2021/22.
Over the following four years it was predicted to have netted the Treasury around £2.5bn.
The government had yet to respond when asked by Sky News about whether there would be a shortfall between these expected revenues and those coming in under the new system.
Rishi Sunak, the chancellor, said: “Following the landmark deal achieved earlier this month, I am delighted we have agreed a way forward on how we transition from our digital services tax to the newly agreed global tax system.
“This agreement means that our digital services tax is protected as we move to 2023, so its revenue can continue to fund vital public services.”