30 Nov 2018
Digital Services Tax Still Controversial Among EU Finance Ministers
As Hong Kong readers may recall, two proposed Directives were tabled in March 2018 by the European Commission. The Commission proposed EU-wide changes to taxation, mainly due to the seemingly disproportionate revenues that are regularly made by so-called “digital giants”. The measures aim at establishing fair corporate taxation, fostering a competitive economy and generating sustainable tax revenues in the EU’s Single Market. The proposals are controversial on the count of introducing such a tax, as well as on several practical issues.
According to the current proposal, the DST would only be applicable to businesses which fulfil both the following criteria: global annual revenue of more than EUR 750 million and annual EU revenue of more than EUR 50 million. According to preliminary estimates, this could generate yearly revenues of up to 5 billion EUR.
During the latest Council meeting, EU Finance Ministers have made their support for or refusal of the DST clear. It has been reported that Ireland, Sweden and Denmark oppose the tax, with Denmark stating that it would discriminate against US companies. The US reportedly criticised the DST and instead wants to refocus discussions on new taxation models within the OECD.
While the scope of the Commission’s proposal has reportedly received broad support from those Member States favourable to the DST, Finland and Greece expressed their disagreement with the taxation of data sales. Germany, which previously followed a cautious approach to the DST, has now expressed willingness to consider a revised proposal for the interim tax if an agreement at the OECD cannot be reached by summer 2020.
France is strongly in favour of the DST and the tax is a declared priority for the Austrian presidency of the EU. Some voices however believe that the measures do not go far enough and advocate the introduction of a 5% levy instead of the proposed 3%.
Time is of the essence concerning this topic: If the proposal is not adopted soon, the EU might see the emergence of a number of different national digital tax systems. However, with the controversial views described above, reaching an agreement at the next meeting of finance ministers seems unlikely. The UK and Spain are said to be pursuing their own plans already: the UK plans to raise a 2% tax on revenues of firms with a global annual revenue of 500 million GBP or more.
The Commission’s proposals are based on the consideration that digital businesses such as Google, Amazon, Facebook and Apple pay too little tax in Europe. Furthermore, current corporate tax rules that were designed during the pre-internet era fail to recognise the new ways in which profits are created in the digital world, where companies make profits from digital services in numerous countries, through the provision of online services, but without being physically present.
The Commission suggested the following two-step approach to remedy these perceived shortcomings: a common EU solution for digital activities in the long run, and the introduction of an interim tax of 3% on digital services in the meantime.
(1) the proposed Directive laying down rules relating to the corporate taxation of a significant digital presence contains a permanent solution for the taxation of the digital economy in the EU, achieved by extending the concept of permanent establishment so as to include a significant digital presence through which a business is maintained. This enables Member States to tax profits made in their territory, even if a company does not have a physical presence there, provided that businesses have a significant digital presence. This would be the case if the company reaches at least one of the following thresholds: (i) revenues from the supply of digital services exceed EUR 7 million, (ii) the number of users exceeds 100,000, or (iii) the number of online business contracts exceeds 3,000.
The proposed rules aim to ensure that online businesses contribute to public finances at the same level as traditional 'brick-and-mortar' companies. Hong Kong companies should note that this proposal is accompanied by a Recommendation (EU Recommendations are non-binding instruments) to Member States to amend their double taxation treaties with third countries so that identical rules apply to EU and non-EU companies.
(2) the proposed Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services proposes an interim tax, aimed at ensuring that those activities which are not currently effectively taxed would begin to generate immediate revenues for Member States. This interim tax is only to apply until the comprehensive reform has been implemented in order to prevent Member States taking unilateral measures. The interim tax, of a proposed 3%, would apply to revenues made from three main types of services, where the main value is created through user participation: (i) the sale of online advertising space, (ii) the sale of user generated data, and (iii) digital intermediary activities which facilitate user interaction, i.e., which allow users to interact with other users and which can facilitate the sale of goods and services between them.