On 21 March 2018, the Commission published two directives establishing new taxation rules for digital companies virtually active in the EU and large digital services providers relying on their users in value creation. The legislative package includes a long-term, permanent solution introducing the concept of “significant digital presence” and a short-term quick fix to deal with the issue pending agreement among EU Member States on the former. The Commission acknowledges that ideally the issue must be addressed at a global level. Due to the lack of progress in finding international consensus in the framework of the Organization for Economic Cooperation and Development, the Commission decided to move ahead and take the lead in this agenda.
Under the long-term proposal, businesses will be deemed to have a taxable digital presence if they fulfil at least one of the three criteria listed in the directive. A business will be liable to pay tax if it has, in the territory of an EU Member State, over 100 000 digital users; and/or generates annual revenues exceeding EUR 7 million; and/or closes more than 3,000 business contracts for digital services in one year. As such, the proposed Directive does not imply a new tax but rather re-allocates corporate taxation rights by marking a shift in the way profits are allocated to the Member States. It is suggested that the proposed principles are incorporated into the scope of the Common Consolidated Corporate Tax Base currently negotiated in the Council of the EU.
This long-term solution does not cover situations where businesses are tax residents of third countries, which have concluded double-taxation treaties with the EU Member State concerned. The Commission therefore also puts forward a recommendation on the adaptation of the Member States’ double-taxation treaties with non-EU jurisdictions. To ensure consistent application at the international level, the Commission recommends that double-taxation treaties take into account the rules on profit attribution and digital presence introduced in the “long-term solution” directive.
The quick fix, designed to prevent a proliferation of unilateral measures at national level, introduces the so-called Digital Services Tax (“DST”). A 3% DST on gross revenues (rather than profits) will primarily affect businesses selling online advertising space, data generated by users or intermediating peer-to-peer sales. The Commission estimated that out of the 180 companies that would fall under the scope of the directive, half are based in the United States and a third in the EU. This is a result of the proposed annual global revenue threshold of EUR 750 million at the level of the multinational group, and a European threshold on revenues derived from digital services set at EUR 50 million.