On March 21, the European Commission (EC) issued proposals for two directives that would change the taxation of companies with a digital footprint within the European Union (EU). As an interim measure, the EC proposed a digital services tax (DST) and as a longer-term measure, the EU would amend corporate tax rules to include a new concept of digital permanent establishment (PE), accompanied by revised profit attribution rules.
With respect to the DST, the proposal would introduce a 3% tax within the EU on gross revenues derived from digital activities by which users play a role in value creation. The DST would only apply to companies with worldwide revenues that exceed €750 million for the latest complete financial year; and revenues from the EU within that year from taxable digital activities that exceed €50 million, thereby limiting the application of the tax to cases where there is a significant digital footprint within the EU in relation to the revenues covered by the DST.
The DST would be imposed on gross revenue where users play a major role in value creation, including revenues derived from selling online advertising space, selling data generated from user-provided information, and digital intermediary activities that allow users to interact with other users and that can facilitate the sale of goods and services between them. The supply of digital content, payment services, online sales goods or services and certain regulated financial and crowdfunding services are specifically excluded from the digital services tax.
If a business belongs to a consolidated group for financial accounting purposes, the thresholds are applied in respect of total consolidated group revenues. The DST would apply irrespective of whether a business has a physical presence within the EU. Furthermore, as a gross revenue-based tax, no provisions are provided for companies generating losses. Based on these parameters, the EC has estimated that up to 150 MNEs would be subject to the DST, which could generate up to €5 billion in annual tax revenues across the EU. The EC also intends that the DST would only apply until the longer-term solution regarding significant digital presence is implemented.
The EC’s proposal would also amend corporate tax rules to include a new concept of digital PE accompanied by revised profit-attribution rules.
The revised rules would require a company to pay income tax in an EU member state where the company is deemed to have a significant digital presence (SDP) by fulfilling any of the following requirements in that member state:
- Revenues from digital services exceed €7 million in a taxable year
- The number of users of digital services in a taxable year exceed 100,000
- The number of business contracts for digital services created between the company and business users in a taxable year exceeds 3,000
Given these parameters, many companies could become subject to increased corporate taxes in the EU than the number of companies subject to the interim DST. The SDP proposal does not provide the rate of tax to be applied by an EU member state to the resulting profits.
The EU Parliament will be consulted on the proposals, with the proposals then provided to the EU Council for deliberation and potential adoption. The EC hopes that adoption will occur by Dec. 31, 2019, for transposition into the national laws of EU member states by Jan. 1, 2020, with respect to tax periods beginning on or after that date.
As tax legislation, the unanimous approval by all 28 EU member states is required. In a joint statement released on March 21, the Ministries of Finance of France, Germany, Italy, Spain and the United Kingdom provided support for the proposals. Ireland, the Netherlands and Luxembourg, on the other hand, have expressed strong opposition to the proposals. If unanimous approval is not obtained, the EU’s enhanced cooperation mechanism, in which a subgroup of nine or more member states proceed together but without the mandatory inclusion of other member states, is a possibility.
Some member states, for example, have already stated that enhanced cooperation would make sense if at least 20 member states joined, with reportedly 19 member states already having agreed with the proposals.
It should be noted that certain member states may move forward unilaterally with their own national implementation of a DST or similar tax. For example, on March 13, the Chancellor of the Exchequer of the United Kingdom presented the Spring Statement 2018 to Parliament, which contained digital economy tax measures including a tax levy on the revenue of digital companies as an interim measure.
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