On December 13, 2018, the Members of the European Parliament (MEPs) confirmed their legislative proposals in respect to the imposition of a Digital Services Tax (hereinafter “DST”) for entities with digital presence - as opposed to physical presence - or substance, in a given County. The Parliament is pushing for an approval before the end of its mandate which expires in April of 2019.
It was resolved that any supply of “content on a digital interface such as video, audio, games, or text, using a digital interface” by an entity, should be subject to the DST. The tax – proposed to be implemented at a rate of 5% versus a previously discussed 3% - will have to be paid in each EU member state where revenue is generated.
It is important to note that the imposition of the DST would only concern entities with worldwide revenue exceeding EUR 750 million as well as revenues within the European Union exceeding Euro 40 million during the fiscal year in question (both requirements must be fulfilled in order for DST to be levied). The European Commission had previously suggested a EUR 50 million threshold.
In addition, the DST shall apply regardless of whether the entity in question has been established within the EU or whether the entity owns the content in question or has acquired rights to distribute it.
The European Parliament aims to close the gap between taxation of digital revenues and traditional revenues. Currently, on average, digital businesses face an effective tax rate of only 9.5%, compared to 23.2% paid by traditional business models.
MEPs proposed that the DST should be applied to revenues resulting from the provision of digital services that are largely reliant on user value creation and the ability to deliver services with none or a very limited physical presence/substance. In these cases, there is typically a difference between the place where the profits are taxed (where the entity is domiciled) and the place where the users are established (where the revenue is sourced). The December vote was more ambitious than previously proposed as MEPs agreed to also include online streaming services in the list of services to be affected.
Companies providing, among others, IT services or any relevant digital service, are advised to closely follow related developments in the coming months and seek custom professional assistance and expert tax advice in a potentially quickly changing digital tax landscape.