Taxation of enterprises that use digital technology remains high on the political agenda of international fora and should be seen in the broader context of the fight against base erosion and profit shifting (BEPS) and the perceived mismatch between taxation and value creation for digital activities.
While the OECD Interim Report on the “Tax Challenges Arising from Digitalisation”, published on March 16, 2018, followed-up on the work delivered in 2015 under Action 1 of the BEPS Project, discussions on the taxation of the digital economy have intensified at the EU level since September 2017. On March 21, 2018, the European Commission issued several proposals on a Fair and Effective Tax System in the EU for the Digital Single Market, including a Directive proposal on a DST, a Directive proposal on the introduction of a digital permanent establishment concept, and Recommendations to Member States to implement this concept in their double tax treaties.
According to the European Commission’s proposal (see ETF 360), the new DST would apply as of January 1, 2020, and would be levied on gross revenues at the single rate of 3%. The DST would only apply to businesses that cumulatively meet certain thresholds (i.e. entities with a total annual worldwide revenue above EUR 750 million and a total annual revenue stemming from digital services in the EU above EUR 50 million), and to certain digital services, including the supply of advertising space, the making available of marketplaces, and the transmission of collected user data.
Following an informal ECOFIN meeting in September 2018 (see ETF 380) during which the EU Finance Ministers broadly agreed on the need to implement a DST, under the condition that it would be a temporary levy (sunset clause), the Austrian Presidency of the EU presented, on November 6, 2018, a state of play of the negotiations, identifying the following key points of discussion:
- The EU Finance Ministers discussed whether the sale of user data should be excluded from the scope of the DST, and if so whether technical solutions should be elaborated to prevent the circumvention of the taxation of online advertising. Most delegations expressed a preference for maintaining all three taxable services as proposed by the European Commission, while Finland, the United Kingdom, Germany, and Poland advocated for a revised scope.
- The EU Finance Ministers also debated whether the DST should have a fixed expiry date or whether the temporary application of the EU DST should be linked to developments at the G20/OECD level. While all Member States agreed that the DST should no longer be applicable once a comprehensive solution at the global level is in place, there were diverging views as to how to proceed. France suggested in that respect that once adopted, the implementation of the DST could be delayed to the end of 2020, unless a global solution is found in the meantime.
In addition, the Austrian Presidency acknowledged that the Member States had reached a general agreement on most of the definitions, including multi-sided digital interfaces and targeted advertising, and on the fact that, in principle, the collection of the DST should take place without the one-stop-shop mechanism, although non-EU resident taxable persons would have to nominate a tax representative to fulfil their DST obligations. However, a number of delegations mentioned that further work is needed at the technical level, for example regarding the compatibility of the DST with double tax treaties, the proposal’s legal basis, or the cliff-edge effect of the minimum thresholds. Luxembourg in particular questioned whether financial services should be included in the scope of the tax. Of the sceptics, Sweden, Denmark and Ireland clearly expressed their opposition to the DST as it stands.
Nevertheless, the Austrian Presidency reiterated that the objective is to reach agreement on the implementation of a DST by the end of the year, with a political debate to be held during the next ECOFIN on December 4, 2018.