OECD-led discussions resulted in 136 countries agreeing a plan for a new system where multinationals pay their fair share of tax in the countries they do business (known as Pillar One), while countries operate a minimum 15% corporation tax rate (known as Pillar Two).

Certain countries (the UK, Austria, France, Italy, Spain and the US) had already unilaterally implemented digital services taxes (DSTs) in their own territories. These are essentially revenue-based taxes that charge a certain percentage of tax on digital-based multi-national enterprises generating sales (primarily from online) from customers in those territories.

The deal struck by the UK, US and other European countries outlines a roadmap for transitioning from existing domestic DST regimes to Pillar One.

Commenting on the deal, Chancellor Rishi Sunak said he is “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,” said Sunak.

US tariffs to be dropped

As part of the deal, the US will not levy tariffs in response to the UK’s DST, which was introduced in April 2020. The UK will also continue to apply its DST until the Pillar One reforms become operational.

The DST credit agreement outlines that once Pillar One is in effect, firms will be able to credit the difference between what they have paid in DST from January 2022, and what they would have paid if Pillar One had been in effect instead, against their future corporation tax bill.

This means that businesses currently subject to the UK’s DST will essentially not have to pay more than they would have to if Pillar One were already in place from 2022 (assuming they are able to make use of any tax credits generated).

HM Treasury confirms that DST will then be removed in favour of the global solution, which they say was always the UK’s intention.

• Read the joint statement from the UK, Austria, France, Italy, Spain and the US regarding a compromise on a transitional approach to existing unilateral measures during the interim period before Pillar 1 is in effect.