On October 29, 2018, the EU Council Presidency identified several issues with respect to the European Commission’s March 21, 2018 proposal for a Council Directive on a digital services tax (DST) on revenues from the provision of certain digital services. See BEPS Action 1. There will be an upcoming policy debate at the Council (ECOFIN) on November 6, 2018.
On March 21, 2018, the EU released two legislative proposals on taxing digital business activities. See the Commission’s press release. The proposal for a DST would be an interim tax, which covers the main digital activities that currently escape tax altogether in the EU. The tax will apply to revenues created from activities where users play a major role in value creation, and which are the hardest to capture with current tax rules, such as revenues created from (1) selling online advertising space; (2) digital intermediary activities, which allow users to interact with other users and which can facilitate the sale of goods and services between them; and (3) the sale of data generated from user-provided information.
Tax revenues would be collected by the member states where the users are located, and will apply only to companies with total annual worldwide revenues of €750 million and EU revenues of €50 million. An estimated €5 billion in annual revenues could be created for member states if the tax is applied at a rate of 3%.
The other proposal is a long-term solution to reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels. A digital platform will be deemed to have a taxable ‘digital presence’ or a virtual PE in a member state if it fulfils one of the following criteria:
- It exceeds €7 million in annual revenues in a member state.
- It has more than 100,000 users in a member state in a taxable year.
- Over 3,000 business contracts for digital services are created between the company and business users in a taxable year.
The Presidency has been moving forward on the following issues:
- Definitions of multi-sided digital interfaces and targeted advertising.
- DST collection should function without the one-stop-shop.
- A taxable person that has no business or fixed establishment within the EU must nominate a tax representative to fulfil the obligations under the DST in his name and on his behalf.
- The Working Party on Tax Questions (Digital Taxation) (“WPTQ”) has started an examination of the recitals that are essential to interpret DST provisions.
- WPTQ is finalizing provisions on administrative cooperation.
Under the March 21, 2018 DST proposal, revenues from the provision of each of the following types of services will qualify as “taxable revenues”:
- Placing target advertising on a digital interface.
- Making available to users a multi-sided digital interface, which allows users to find other users and to interact with them, and which may also facilitate the provision of underlying supplies of goods or services directly between users (i.e., “intermediation” services).
- Transmission of data collected about users and generated from users’ activities on digital interfaces (i.e., “sale of user data”).
The EU Presidency has identified two main concerns about the DST that require additional guidance:
- Whether the DST should exclude the “sale of user data” from taxable revenues.
- Whether the DST should have a “sunset clause,” and if so, whether it should have a fixed expiration date or whether the expiration should be linked to developments at the OECD/G20 level.
The Presidency will instruct the WPTQ to make additional progress on the proposal, and plans to reach an agreement on the DST by the December 2018 ECOFIN Council.
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