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BEPS

European Parliament Proposes Amendments to Tax on Digital Services

Jessica Silbering-Meyer  

Jessica Silbering-Meyer  

On October 22, 2018, the European Parliament’s Committee on Economic and Monetary Affairs issued a draft report highlighting potential amendments to the European Commission’s March 21, 2018 proposal for a digital services tax (DST). See BEPS Action 1.

While some members of Parliament believe that a DST could harm businesses or not do enough to close tax loopholes, other members strongly support a DST. See below for some of the objections and suggestions made to the proposed DST:

  • Introducing the DST does not close gaps in the present tax regime, nor does it shut down tax havens. In addition, a DST could lead to new tax avoidance strategies, where companies above the minimum threshold could separate or downsize.
  • The EU should focus instead on creating a more attractive business environment to achieve a well-functioning Digital Single Market, while waiting for a global solution on taxing the digital economy.
  • Coherence with the BEPS Inclusive Framework should be ensured given the absence of consensus on interim measures.
  • Amendments to the EU definition of permanent establishment (PE).
  • Introduction of a sunset clause, where the provisions of the proposed DST would automatically cease to apply by December 31, 2025 (or earlier) if no permanent and comprehensive solution has been found.
  • The proposed DST is a tax on turnover instead of on profits. This deviates from fundamental principles of international taxation.
  • The proposed DST will require companies to keep significant volume of user data to calculate the tax in each member state. This approach is not compliant with data protection safeguards.

Background

On March 21, 2018, the EU released two legislative proposals on taxing digital business activities. See the Commission’s press release. The proposed 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.

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