On 21 March 2018, the European Commission (EU Commission) proposed two Council Directives addressing the taxation of the digital economy. The introduction of a digital services tax (DST) on revenues from certain digital services, as an interim solution, should affect about 100 large companies, mostly U.S.-based. The corporate taxation of a significant digital presence (Digital PE) would be the comprehensive long-term solution and could have an impact on companies across a wider range of economic sectors, such as media & entertainment and IT services. The EU Commission hopes that the proposed rules would apply as from 1 January 2020.
The EU Commission’s proposals come after the OECD published an interim report on the tax challenges of the digitalising economy on 16 March 2018. The OECD is the preferred forum for those who want to preserve a global level playing field, but reaching a consensus is difficult: interim measures (like the DST) are contentious and some countries consider no action is needed pending the implementation of the BEPS recommendations. In particular, the US has expressed strong opposition against taxation of internet companies on a gross basis, as would be the case under the DST.
The preferred ‘comprehensive’ option: the Digital PE
The EU Commission’s long-term option is also the focus of OECD’s ongoing work: both forums aim at adapting the permanent establishment concept to the digitalising economy. Certain digital services providers would be taxed in the countries where they have a significant digital footprint and generate value from technology, users’ interactions and users’ data. New rules to establish such taxable presence and new profit allocation rules would need to be introduced in domestic law and would also need to be implemented in tax treaties. The Digital PE option would not apply to companies resident in a non-EU country that has a tax treaty with the EU Member State where these companies have a significant digital presence; for that reason, the EU Commission issued a recommendation to amend these tax treaties. The EU Commission will also propose corresponding amendments to the CCCTB proposal. Please click here to read further details on the proposals for the Digital PE.
The ’interim’ measure: the DST
The proposed DST is a 3% turnover tax that targets digital service providers with annual worldwide revenues exceeding EUR 750 million and revenues from the provision of digital services in the EU exceeding EUR 50 million. Digital services covered by the DST are (i) valorising user data by placing (online) ads targeting users of the digital interface, (ii) transmitting user data generated from their activities on digital interfaces, or (iii) making available a digital interface for users to supply amongst themselves goods and services (i.e., online marketplaces). The supply of IT solutions and digital products, as well as online retail activities and intragroup digital services would not be subject to the DST. Consequently, only a limited number of companies are likely to be affected. The EU Commission suggests (but does not propose a binding provision) to stop applying the DST to taxpayers that would be taxed under the comprehensive option, once implemented, i.e., taxpayers resident in the EU or in non-EU countries that do not have a tax treaty with the EU Member State of the Digital PE. By the same token, this means that the ‘interim’ DST will become a permanent tax for companies that are not subject to the Digital PE rules. Please click here for more information on what the DST would mean for your company.
For the proposals to be accepted, EU Member States need to reach unanimity. This will be challenging for a number of reasons. For example, the proposed reforms would reallocate taxing rights from (often smaller) EU Member States that host the European headquarters of large digital economy companies to bigger EU Member States with large user bases. Such headquarter countries generally seem to seek a solution that is globally supported.
The EU Commission and the EU Member States supporting the current initiatives hope for a swift approval process and a subsequent implementation in domestic law by 31 December 2019, so that the new rules would become effective as from 1 January 2020. However, the lack of global consensus observed by the OECD and the opposition expressed by the US could jeopardise this.