The Interim Solution is a temporary solution while the Comprehensive Solution is being further discussed and developed and implemented by Member States. The proposal provides the system of taxation at a rate of 3% of gross revenues derived from the supply of specific digital services as provided by large digital enterprises (the Digital Services Tax or DST). Taxation on gross revenues related to specific digital services was found the preferred interim option by respondents to the stakeholder consultation (which can be divided into a public consultation open from October 2017 to January 3, 2018 and a targeted survey sent to the different tax administrations of EU Member States).
The proposal amongst others sets out when a digital enterprise is considered large and thus a taxable person for DST, the scope of relevant digital services for DST, the place of taxation and the obligations of taxable persons with a DST liability.
Taxable persons for DST
A company is subject to DST if the following requirements are cumulatively met:
(i) its global gross revenues reported for the latest complete financial year for which financial statements are available exceeds EUR 750 million (the Global Revenue Requirement); and
(ii) the total amount of taxable revenues (discussed below) within the European Union during such financial year exceeds EUR 50 million (the EU Taxable Revenue Requirement).
The thresholds are applied at consolidated group level in case the business belongs to a consolidated group for financial accounting purposes.
The Global Revenue Requirement limits the application to companies of a certain scale and should thus exclude small enterprises and start-ups for which the compliance burdens would have a disproportionate effect. Whereas the EU Taxable Revenue Requirement also limits the application of DST to situations where there is a significant 'digital footprint' in the European Union and the threshold is at European Union level to taking into account the different market sizes that exist within the European Union.
Scope of relevant digital services
Taxable revenues are the revenues derived from the supply of certain specific digital services that relate to user value creation. The scope of digital services (considered taxable services leading to taxable revenues) consists of:
- making available online advertisement space (as well as sale of collected users data generated from such users' activities;
- so-called "intermediation services" which allow users to find other users and to interact, connecting supply and demand and which may also facilitate the provision of underlying supplies of goods/services between them directly.
The proposal provides several examples to clarify the scope of digital services. For instance the supply (through an interface) of digital content such as video, audio or text is not considered to be a intermediation service and thus not included in the scope of digital services (and thus not resulting in taxable services leading to taxable revenues). Whereas for instance making available a multi-sided digital interface (where users can upload and share content with other users) falls within the scope of services subject to DST. As such companies should determine (together with experts) whether the services provided could fall within the scope of the DST.
Place of taxation and obligations of taxable persons
The DST would be due in the Member State or the Member States where the users are located, i.e. this due to the fact that the user's involvement is considered to create the value for the company. The proposal provides for allocation keys of the taxable revenues between Member States. Whereas there is a deeming fiction that users are located in the Member State of the IP (Internet Protocol) address of the device used, or, if more accurate another method of geolocation.
The entity providing the taxable services is liable for the fulfilment of the DST obligations, whereas in case of a consolidated group for financial accounting purposes, one single entity can be appointed to fulfil the DST obligations on behalf of all taxable persons of that group.
A One Stop Shop (OSS) will be made available in order to simplify and manage the administrative aspects of DST providing a taxable person in one or more Member States with one contact point, the so-called Member State of Identification (the MSoI). The MSoI would subsequently be responsible for sharing the information with other Member States and transferring the portion of DST as collected on behalf of such other Member States. The DST is based on a self-declaration system for taxable persons, i.e. by filing a notification in the MSoI declaring that a company is liable for payment of DST (together with other details requested) (Declaration). Also in the situation a company ceases to be liable to DST a notification should be filed. The DST return should be filed in the MSoI together with the information asked for.
The EU Commission is of the opinion that introducing the DST cannot be considered a breach of double tax treaties with third countries or WTO rules stating that it is fully grounded on the basic principle of taxation that profits should be taxed where the value is created. Since the DST deviates from currently accepted tax principles, it would be good to be provided with the full analysis supporting the statement of the EU Commission.