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The Digital Service Tax – where are we heading?

The Digital Service Tax

The Digital Service Tax

A political agreement concerning the introduction of a Digital Service Tax no longer seems achievable in 2018, considering there is still no consensus within the EU about this new tax on digital services. It is essential that some progress be made at a European level in the coming months. If not, various Member States will develop their own legislation in this area, which could be disastrous for the European digital single market.

On 21 March of this year, the European Commission published various proposals for a fair and effective tax system in a European digital single market. These proposals focus on, among others, the introduction of a Digital Service Tax (DST) and the concept of a “digital permanent establishment.” For this, we refer to our earlier article.

The DST, as a transitional measure in anticipation of such a permanent digital establishment, has been the subject of thorough diplomatic and political discussions in recent months. The hope is that a consensus will be reached within the EU towards the end of the year when the Austrian presidency of the Council comes to an end. Austria was a proponent of the DST and gave it priority on its political agenda. As of 1 January, Romania will take over the presidency, and we will therefore have to wait and see whether Romania will also give the DST the same priority.

What does the DST proposal look like at this time?

Based on the last proposal published by the Council, the DST can be summarized as follows:

  • The tax would apply to companies that have both an annual total worldwide turnover higher than EUR 750 million and whose total annual turnover earned from digital services within the European Union is higher than EUR 50 million.
  • The rate on turnover is 3%.
  • The tax would be owed on the turnover from the following digital services: the placement of targeted advertisements on a digital platform, operating a digital platform and the sale of user data.
  • Regulated financial services provided by regulated financial entities, as well as the sale of data by regulated financial entities would be exempt from the tax.
  • A sunset clause and an evaluation clause would be added, whereby the DST would gradually be phased out when a (global) agreement is created at an OECD level.

 

In the latest version of this proposal, the DST would apply as of 1 January 2022. No consensus was reached on this proposal within the Council of the European Union. Despite insistence from France, Germany did not budge. Berlin is striving for a global agreement first via the OECD and will only consider this EU route once such an agreement within the OECD is no longer possible. Meanwhile, we are looking forward to the OECD interim report expected in January 2019. The objective of the OECD is very challenging, namely a global consensus on the taxation of the digital economy by the end of 2020.

National initiatives: a risk for the digital single market

In addition to the new French-German proposal (still to be developed), a number of member states have also considered national initiatives. Spain and the United Kingdom – which will be leaving the European Union in March 2019 – have already stated that they will introduce their own national tax on digital services if no consensus can be reached at a European level. France has recently also expressed a similar intention.

These various national initiatives are not without risk. The lack of coordination and harmonization among the national tax authorities is harmful for the European internal market and may result in double taxation. That is why an approach at an EU level or even a global level via the OECD is not a luxury, but a necessity.

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