As published on the Times of Malta Sunday Newspaper on the 27th October 2019.
The European Commission presented its Digital Taxation Package and proposed new rules to ensure that digital business activities are taxed in a fair and growth-friendly way in the EU. The measures would make the EU a global leader in designing tax laws fit for the modern economy and the digital age. Essentially, the Digital Taxation Package consists of the following digital service taxation proposals:
1. The proposal for a Council directive laying down rules relating to the corporate taxation of a significant digital presence.
Digital technologies bring many benefits to society and, from a tax perspective, they create opportunities for tax administrations and offer solutions to reduce administrative burdens, facilitate collaboration between tax authorities, as well as addressing tax evasion. However, digitalisation is also putting pressure on the international taxation system, as business models change.
Policymakers are currently struggling to find solutions which can ensure a fair and effective taxation as the digital transformation of the economy accelerates, and the existing corporate taxation rules are outdated to catch such evolution. The application of the current corporate tax rules to the digital economy has led to a misalignment between the place where the profits are taxed and the place where value is created.
In particular, the current rules no longer fit the present context where online trading across borders with no physical presence has been facilitated, where businesses largely rely on hard-to-value intangible assets, and where user generated content and data collection have become core activities for the value creation of digital businesses.
This proposal aims at addressing the issues raised by the digital economy by setting out a comprehensive solution within the existing member states’ corporate tax systems. It provides a common system for taxing digital activities in the EU which properly takes into account the features of the digital economy. Moreover, the proposal aims at addressing the issues raised by the digital economy by setting out a comprehensive solution within the existing member states’ corporate tax systems. It provides a common system for taxing digital activities in the EU which properly takes into account the features of the digital economy.
An important consideration is laid down in Article 3 of the proposed directive which defines “digital services” as follows:
“Services which are delivered over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology, including in particular the supply of digitised products generally, including software and changes to or upgrades of software and services providing or supporting a business or personal presence on an electronic network such as a website or a webpage.”
Article 4 of the proposed directive goes on to delineate the features of significant digital presence. A “significant digital presence” shall be 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:
a) The proportion of total revenues obtained in that tax period and resulting from the supply of those digital services to users located in that member state in that tax period exceeds €7 million;
b) The number of users of one or more of those digital services who are located in that member state in that tax period exceeds 100,000;
c) The number of business contracts for the supply of any such digital service that are concluded in that tax period by users located in that member state exceeds 3,000.
The concept of a significant digital presence is intended to establish a taxable nexus in a jurisdiction. Therefore, it should be regarded as an addition to the existing permanent establishment concept. The proposed rules for establishing a taxable nexus of a digital business in a member state are based on revenues from supplying digital services, the number of users of digital services or the number of contracts for a digital service. These criteria are proxies for determining the ‘digital footprint’ of a business in a jurisdiction based on certain indicators of economic activity.
2. Proposal for a Council directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services.
This proposal sets out the common system of a tax on the revenues derived from the supply of certain digital services by taxable persons (hereinafter ‘Digital Services Tax’ or ‘DST’). The specific objective of this proposal is to put forward a measure that targets the revenues stemming from the supply of certain digital services and that is easy to implement and helps to level the playing field in the interim period until a comprehensive solution is in place.
DST is a tax with a targeted scope, levied on the revenues resulting from the supply of certain digital services characterised by user value creation.
The services falling within the scope of DST are those where the participation of a user in a digital activity constitutes an essential input for the business carrying out that activity and which enable that business to obtain revenues therefrom. In other words, the business models captured by this directive are those which would not be able to exist in their current form without user involvement.
3. The way forward.
As a result of these discussions the European Commission considers that all aspects of the draft directives have been examined and all possibilities to make progress at a technical level have been explored. The text enjoys broad support from large number of delegations. However, a number of concerns continue to be raised. A number of delegations continue to have fundamental objections as a whole, irrespective of the technical adaptations made to the text.
Ultimately, even though the Council cannot reach an agreement on EU digital services tax, the Council took note of the progress achieved in the negotiations on the digital services tax, since the issue was last discussed at the Council meeting in December 2018, on the basis of a new compromise text setting out a scope limited to digital advertising services.
In parallel, the Council presidency will conduct work on the EU position in international discussions on digital tax, in particular in view of OECD’s report on the issue, due by mid-2020.
Franklin Cachia is Senior Manager Tax and Regulated Industries at CSB Group.