Digital Services Tax And What It Means For Advertisers

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The new Digital Services Tax is here. What does it mean for advertisers and agencies?

Like a naughty child knowing that they can flash those big eyes at a scolding parent and get away with it, there is a time when enough is enough.

The parent, in this case, being the UK Government and the naughty children being the FAANGS – namely, Facebook, Amazon, Apple, Netflix, Google and Spotify. Or to quote the Government, “Large multinational enterprises with revenue derived from the provision of a social media service, a search engine or an online marketplace to UK users.”

The tax will be part of an international framework.

What is Digital Services Tax?

It is a tax rule that will be levied against the companies operating in this field mentioned above and was originally designed to try and even the playing field between those companies that have a physical footprint e.g. retail shops and outlets and those that sell solely online.

Many may see this as a little late as most retailers will have some form of online presence to sell through a third-party channel like Amazon.

The other criteria is that it will be applied if the companies group business, from providing these services are more than £500million globally and that £25million of those revenues are from the UK.

The Digital Services Tax will have certain exemptions, for example, financial services providers who sell online.

When is it being introduced?

The Government will apply this tax to revenue earned from the start of the tax year, 1st April 2020. 

However companies like Google may start applying this tax as soon as November 2020. That means they will be adding a tax of 2% on top of all sales based on the criteria outlined above.

Why is it important?

Recent reports in the Guardian from a Google spokeswoman said, 

“Digital service taxes increase the cost of digital advertising. Typically, these kinds of cost increases are borne by customers and like other companies affected by this tax, we will be adding a fee to our invoices, from November. We will continue to pay all the taxes due in the UK, and to encourage governments globally to focus on international tax reform rather than implementing new, unilateral levies.”

How is it paid?

Like many taxes, some are direct and some are indirect.

According to recent reports, companies like Google will be passing the cost of the new Digital Services Tax back directly to advertisers. This will be highlighted in invoices received by advertisers, marketers or media buying agencies. 

This is estimated to add somewhere in the region of £120million to the annual cost to marketers.

Equally, Amazon has told its sellers that it will be passing on the 2% tax e-commerce platform.

Facebook is set to follow suit later this month. 

What now?

In conclusion, Digital Services Tax is a political hot potato but here to stay – at least for now. With most of these companies having originated in the USA and employing, as well as earning more at home, the American government has been keen for the tax not to be implemented, fearing it would harm global operations.

Though with these huge companies passing the cost on to the advertisers and sellers of their platforms and with the reliance we have on these companies, it seems there is little or no choice to expect an increase in cost. This in turn, may then be passed back down to the consumer. 

Sources: 

UK Government Website

Guardian report on Digital Services Tax

 

Reggie James
Having built and sold various technology businesses over the years, Reggie heads the consultancy and commercial side of the business. Approachable and pragmatic, Reggie previously ran the first dot-com to list on the Singapore Stock Exchange as well as developing business strategies for brands whilst at AltaVista and Yahoo! before launching Digital Clarity. As a passive investor, he is also involved in the US public OTC markets.