The 2% digital services tax (DST), which the UK Government has maintained was a placeholder until a robust global solution was found, is to be phased out.

Applied to revenues made by search engines, social media services and online marketplaces, the tax earned the UK Treasury £300 million in 2020/21 financial year.

The scrapping of the DST comes following a deal agreed by 136 countries earlier this month, in which it was agreed that the most profitable multinationals would pay a “fair share” of tax in the countries where they do business – not just where they are headquartered.

Expected to come into force in 2023, the new rules will apply to companies with a profit margin over 10%. A quarter of these profits will then be subject to taxes where the company in question does business.

The DST was initially introduced over growing concerns that large tech companies were shifting the processing of profits to countries where they would be taxed at lowered rates.

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Until the new rules come into effect, the UK will keep revenue from the digital services tax following an agreement reached with the US and other European countries.

Though it’s worth noting, companies will be able to retroactively claim money back as credit any difference between the digital services tax and the new rules, when they come into effect.

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.”

Speaking about the transition away from the digital services tax, chancellor Rishi Sunak 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.”

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