On May 16, 2018, Italy launched a consultation on the March 21, 2018 proposals by the European Commission (EC) regarding taxation of the digital economy. These proposals include a Council Directive for rules on corporation tax of a significant digital presence, a Council Directive for a digital services tax (DST) on revenues derived from the supply of certain digital services by taxable persons, and a recommendation for a corporate tax of a significant digital presence. See BEPS Action 1. The deadline for comments is June 22, 2018.
EC’s proposal for a Council Directive for rules on corporation tax of a significant digital presence (March 21, 2018)
This proposal is a long-term solution that provides a common system for taxing digital activities in the EU. First, this proposal would establish rules on a taxable nexus for digital businesses operating across borders where there is a non-physical commercial presence (e.g., a “significant digital presence”). Second, this proposal includes principles on attributing profits to a digital business. This would align taxation with the value creation of digital business models that rely on intangible assets.
This Directive, once implemented in member states’ national legislation, will apply to cross-border digital activities within the EU, even if the applicable double taxation treaties between member states have not been modified. It will also apply if a business established in a non-EU jurisdiction operates through a significant digital presence in a member state, where there is no double taxation treaty in place between that member state and the non-EU jurisdiction.
A significant digital presence is considered to exist in a member state in a tax period if the business carried on through it consists wholly or partly of the supply of digital services through a digital interface, and one or more of the following conditions is met “with respect to the supply of those services by the entity carrying on that business, taken together with the supply of any such services through a digital interface by each of that entity’s associated enterprises in aggregate”:
- Proportion of total revenues in that tax period resulting from the supply of digital services to users located in that member state in that tax period exceeds EUR 7,000,000.
- Number of users of one or more digital services, who are located in that member state in that tax period, exceeds 100,000.
- Number of business contracts, for the supply of any digital service, that are concluded in that tax period by users located in that member state, exceeds 3,000.
The profits that are attributable to a significant digital presence in a member state are taxable only within that state’s corporate tax framework.
EC’s Proposal for a Council Directive of a DST on revenues derived from the supply of certain digital services by taxable persons (March 21, 2018)
This proposal is an interim solution where a ‘taxable person’, with respect to a tax period, is an entity meeting both of the following conditions: (a) the total amount of worldwide revenues reported by the entity for the relevant financial year exceeds EUR 750,000,000; and (b) the total amount of taxable revenues obtained by the entity within the EU during the relevant financial year exceeds EUR 50,000,000.
The revenues resulting from the provision of each of the following services by an entity shall qualify as ‘taxable revenues’: (a) the placing on a digital interface of advertising targeted at users of that interface; (b) the making available to users of 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; (c) the transmission of data collected about users and generated from users’ activities on digital interfaces.
Revenues include total gross revenues, net of value added tax and other similar taxes. Taxable revenues obtained by an entity in a tax period is treated as obtained in a member state in that tax period if users of the taxable service are located in that member state in that tax period.
A 3% DST is chargeable in a member state on the proportion of taxable revenues obtained by a taxable person in a tax period, and that is treated as obtained in that member state. The DST is due in that member state on the next working day following the end of the relevant tax period.
EC Recommendation on corporate tax of a significant digital presence
This Recommendation includes a proposal for adaptations to member states’ double tax conventions with non-EU jurisdictions to extend the concept of a permanent establishment (PE) to include a significant digital presence, through which the business of an enterprise is wholly or partly carried on in another jurisdiction, and to include rules on attributing profits to a significant digital presence.
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