The government has announced it will phase out the Digital Services Tax (DST) and transition to a new global tax system.

On Thursday, the UK struck a deal with the US and other European countries which outlines a DST-credit system that will bridge the gap between the existing tax and the start of the new system, due to be implemented in 2023.

HM Treasury said that a global tax would ensure that multinational companies “pay their fair share” in the countries where they do business.

Earlier this month, 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 – whilst countries operate a minimum 15 per cent corporation tax rate, which is known as Pillar Two.

“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,” said chancellor Rishi Sunak. “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.”

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 keep the revenue raised from the DST until the Pillar One reforms become operational.

The DST credit agreement outlines that once Pillar One is in effect, firms will be able use 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, as credit against their future corporation tax bill.

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 the government says was always the UK’s intention.

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