As an increasing number of countries propose and enact digital services taxes (DSTs), global digital-based businesses may find that they are subject to substantial tax liabilities and tax reporting obligations across multiple jurisdictions. The following summary provides an overview of DST regimes and highlights the practical implications for international digital services providers.
What is a DST?
A DST is a tax imposed on certain cross-border digital earnings based on consumer location. Though implementation differs between countries, DSTs are generally imposed on gross revenues and only apply to companies that meet defined domestic and / or global minimum revenue thresholds. For example, France's DST applies to companies with annual digital services revenue in excess of (i) 750 million Euros worldwide, and (ii) 25 million Euros in France.
Who does a DST apply to?
DSTs generally apply to businesses selling eligible digital services to consumers located within a jurisdiction that imposes a tax on digital services. The taxability of specific services varies between countries; common taxable services include video streaming, online advertising, digital marketplaces, ride-hailing, and booking platforms. For example, France's DST applies to digital intermediary services and online advertising services, whereas the U.K.'s DST applies to revenues from search engines, social media platforms, and online marketplaces. Accordingly, technology companies with international consumers should carefully analyze the taxability of their services on a country-by-country basis.
As noted above, only businesses whose digital services revenues exceed the applicable revenue thresholds will be subject to DST.
Which countries have imposed a DST?
France, Austria, Hungary, Italy, India, Turkey and several other countries have already implemented a DST. Belgium, Canada, Chile, Israel, Spain, and the U.K. are among the many countries that have announced intentions and / or proposed legislation to enact a DST.
In addition to country-specific legislation, several international bodies have proposed uniform DST initiatives. The European Commission proposed a DST on revenues derived from online advertising services, online marketplaces, and sales of user-collected data. However, the proposal stalled in March 2019 due to opposition from several E.U. member states. As a part of its negotiations to overhaul the international tax system, the Organisation for Economic Co-operation and Development (OECD) is also working to coordinate a global DST among its nearly 140 members. Countries that have implemented a unilateral DST have generally provided that their domestic regimes will be repealed once an international agreement is reached; however some countries' DST legislation (e.g., France) do not include explicit sunset provisions.
How could DSTs impact a business's U.S. tax profile?
Due to a lack of guidance from U.S. taxing authorities, it is uncertain whether foreign DST liabilities will be creditable against U.S. federal income taxes. Moreover, because a DST is imposed on gross revenues rather than net income, businesses could have DST liabilities even if they are unprofitable. Depending on the taxpayer's specific financial footprint, the impact of a DST could be significantly burdensome.
How has the U.S. responded to DSTs?
The U.S. has aggressively opposed unilateral DSTs and suggested that DSTs are generally discriminatory against U.S. companies.
In response to the French DST, the United States Trade Representative (USTR) initiated a Section 301 investigation to determine if the French DST is prejudicial to U.S. companies. The investigation report, which was released in December 2019, found the DST discriminatory and, as a result, the Trump administration proposed retaliatory tariffs. In response, the U.S. and France mutually agreed to delay (i) imposition of the U.S. tariffs, and (ii) collection of French DST (though tax liability will still accrue in the current year) until 2021.
The USTR announced on June 2, 2020 that it had also opened similar Section 301 probes into the DSTs of ten other U.S. trading partners, including the U.K. and India. The Trump administration has urged these countries to address the taxation of the digital economy at the OECD level and has threatened tariffs in response to imposition of unilateral DSTs; however, France's finance minister has stated that the U.S. is the only country left blocking the OECD's proposal on digital taxation.
How Venable Can Help?
The evolving taxation of the digital economy could significantly impact the financial performance of international technology businesses. Venable's International Tax team can help clients identify which DSTs may apply to their digital products and provide strategic tax planning solutions to minimize their global DST liabilities.