The EU Parliament’s economic and monetary affairs (ECON) committee has published its draft report on the Commission’s proposal for a digital services tax (DST), recommending an increase in the rate of the proposed tax to 5%. The committee looks to broaden the scope beyond just advertising sales, intermediary activities and user-generated content, to include other content supplied via digital interfaces and sales of goods or services via e-commerce platforms.
The report also reinforces the temporary nature of the tax by including a sunset clause ensuring the measure lapses on implementation of longer-term plans for ‘virtual permanent establishments’ or the CCCTB.
The European Commission first set out its broad approach to ‘fair taxation of the digital economy’ in September 2017. This was followed on 21 March 2018 by publication of two separate legislative proposals for taxing activities of digital business in the EU. The first, which also forms part of the Commission’s plans for the common consolidated corporate tax base (CCCTB), would deem a business to have a taxable ‘digital presence’ where it meets certain criteria based on a revenue threshold, user numbers, or contract volumes. The second proposed an ‘interim’ DST at a rate of 3% on revenues from selling online advertising space, digital intermediary activities, and selling user-generated data and content.
The ECON committee’s draft report suggests amendments to the DST proposal, while supporting the Commission’s main aim of protecting the development of small businesses by limiting the tax to companies with annual worldwide revenues above €750 million (and EU revenues of €50 million). The main amendments would:
increase the rate of the DST from 3% to 5%;
broaden the tax by including supplies of digital content such as video, audio or text through digital interfaces, and online sales of goods or services via e-commerce platforms, within the scope of ‘taxable revenue’;
clarify that DST should also apply to the sale and transmission of data collected through active participation of users;
introduce a sunset clause for the DST to lapse with the adoption of proposals for a ‘digital significant presence’ or the CCCTB (including the EU Parliament position on digital permanent establishment);
ask the Commission to review the directive after three years; and
introduce a mechanism for DST returns filed with the member state of identification to be audited every three years.
The 5% rate of DST is intended to result in an imputed average corporate tax rate of 20% for digital businesses, as against the 13% envisaged by the Commission. In arriving at this figure, the ECON committee assumes a profit margin among such businesses of around 25%. This would, in the committee’s words, ‘create a level playing field between traditional and digital companies and allow for a larger tax contribution from a sector which has been, so far, undertaxed’.
According to the Commission’s estimates, traditional ‘bricks-and-mortar’ businesses pay an effective average tax rate of 20.9%, while digital multinational groups engaged in tax planning are subject to a negative average tax rate of -2.3%.
By broadening the scope of the DST to include a wider range of content, the committee seeks to follow the direction of reforms proposed under the CCCTB, enabling member states to tax the value such companies are able to create from their ability to process user data.
The Commission’s intention is for member states to implement the DST by 1 January 2020.
The EU Parliament’s economic and monetary affairs (ECON) committee has published its draft report on the Commission’s proposal for a digital services tax (DST), recommending an increase in the rate of the proposed tax to 5%. The committee looks to broaden the scope beyond just advertising sales, intermediary activities and user-generated content, to include other content supplied via digital interfaces and sales of goods or services via e-commerce platforms.
The report also reinforces the temporary nature of the tax by including a sunset clause ensuring the measure lapses on implementation of longer-term plans for ‘virtual permanent establishments’ or the CCCTB.
The European Commission first set out its broad approach to ‘fair taxation of the digital economy’ in September 2017. This was followed on 21 March 2018 by publication of two separate legislative proposals for taxing activities of digital business in the EU. The first, which also forms part of the Commission’s plans for the common consolidated corporate tax base (CCCTB), would deem a business to have a taxable ‘digital presence’ where it meets certain criteria based on a revenue threshold, user numbers, or contract volumes. The second proposed an ‘interim’ DST at a rate of 3% on revenues from selling online advertising space, digital intermediary activities, and selling user-generated data and content.
The ECON committee’s draft report suggests amendments to the DST proposal, while supporting the Commission’s main aim of protecting the development of small businesses by limiting the tax to companies with annual worldwide revenues above €750 million (and EU revenues of €50 million). The main amendments would:
increase the rate of the DST from 3% to 5%;
broaden the tax by including supplies of digital content such as video, audio or text through digital interfaces, and online sales of goods or services via e-commerce platforms, within the scope of ‘taxable revenue’;
clarify that DST should also apply to the sale and transmission of data collected through active participation of users;
introduce a sunset clause for the DST to lapse with the adoption of proposals for a ‘digital significant presence’ or the CCCTB (including the EU Parliament position on digital permanent establishment);
ask the Commission to review the directive after three years; and
introduce a mechanism for DST returns filed with the member state of identification to be audited every three years.
The 5% rate of DST is intended to result in an imputed average corporate tax rate of 20% for digital businesses, as against the 13% envisaged by the Commission. In arriving at this figure, the ECON committee assumes a profit margin among such businesses of around 25%. This would, in the committee’s words, ‘create a level playing field between traditional and digital companies and allow for a larger tax contribution from a sector which has been, so far, undertaxed’.
According to the Commission’s estimates, traditional ‘bricks-and-mortar’ businesses pay an effective average tax rate of 20.9%, while digital multinational groups engaged in tax planning are subject to a negative average tax rate of -2.3%.
By broadening the scope of the DST to include a wider range of content, the committee seeks to follow the direction of reforms proposed under the CCCTB, enabling member states to tax the value such companies are able to create from their ability to process user data.
The Commission’s intention is for member states to implement the DST by 1 January 2020.
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