The Digital Services Tax and affiliate marketing
Following the introduction of the UK Digital Services Tax some businesses have recently announced these fees will be passed on to the end-user. What might this mean for affiliates who rely on these platforms to generate their traffic?
What is the Digital Services Tax?
In April 2020 the UK government introduced a new Digital Services tax of 2%. The new tax applies to digital businesses that provide a “social media service, search engine or an online marketplace to UK users”.
The tax will only apply to businesses who have a global revenue in excess of £500 million and where at least £25 million of that revenue is derived from UK users, so the tax is specifically targeted at the biggest digital companies.
However, the tax will be levied against companies that are important to traffic generation in the affiliate industry, including Google and Facebook. It may also affect some of the industry’s biggest advertisers, publishers and networks too.
What was the purpose of introducing a new Digital Services Tax?
The aim of the new tax policy is to rebalance how the UK government collects tax from digital businesses. Many governments across the world have long believed that digital businesses need to pay taxes based on where they deliver value, rather than where they are registered or headquartered.
Taxing businesses based on the size and relative importance of UK users to revenue generation is a step towards a new international tax system for digital businesses.
This new system has been in the works for some time, but took a backward step in June when the US pulled out of negotiations despite continued support for the tax in many European countries. This prompted the UK and some other EU countries to push ahead with independent tax changes for digital businesses. In fact, the UK government has publicly stated that its Digital Services tax will be abandoned when ‘an appropriate international solution is in place’.
The Digital Services tax is very much a stop-gap tax – at least publicly – until the world decides on an international standard for taxing digital businesses based on how and where they derive their users. But we can safely assume the Digital Services tax is here to stay, even if its definitions may change in the future.
Why are we talking about the Digital Services Tax now?
Although the tax came in from April this year some of the biggest businesses have recently announced their plans with regards to passing this tax onto those paying to use their services.
At the start of September Google stated that they will pass the cost of the tax onto their customers from November. This will mean increased click costs for all advertising purchased on Google Ads or YouTube.
Apple announced on 1st September that they will add the UK’s 2% tax to the amount deducted from the price of an App before they calculate the proceeds to be distributed to the App’s Developer.
While Facebook have initially indicated that they will not be passing the cost of the 2% digital tax onto their advertisers. Given the social media giant has faced a slow-down in ad growth this year it could be a smart move as it fights to hold on to advertising spend in the face of decreasing user numbers and high-profile privacy issues.
It may also mean publishers view Facebook as a more cost-effective way to generate traffic in the future, and it will be interesting to see if platforms that don’t pass on the digital tax to customers see an increase in popularity.
Digital Tax across Europe
It’s also worth noting that specific taxation for Digital Services is becoming the norm across Europe.
France and Italy both have 3% tax rates for Digital Services, Austria’s is 5% and Turkey’s a whopping 7.5%.
Although these individual tax rates are likely to converge into a new international standard for taxing digital businesses in the future, the idea of tech giants declaring large revenues but comparatively small profits and tax payments are a thing of the past.
How might these recent changes to the Digital Services Tax impact affiliate marketing?
While it’s hard to envisage these changes being materially significant right away, the net effect over time will be higher costs for those publishers that rely on Google’s ad ecosystem for their traffic. With Google’s UK search engine market share at 86% it’s hard to think this will not eat into publisher profits over time.
Online marketplaces, who are some of the industry’s biggest spending advertisers, will also be levied the fee against revenue driven by UK users, and as of 1st September Amazon have increased fees for its sellers by 2% in response.
In general, higher taxes normally mean higher costs to the ‘end-user’, and in the case of affiliate marketing it’s likely publishers and to a lesser extent advertisers will ultimately bear that cost.
What will be interesting in the case of Google is how this may play out for publishers who spend significant amounts obtaining traffic from the search engine, as the tax will be applied from November which corresponds with peak trading, Black Friday and the Christmas period.