Plan to accelerate international deal on digital taxation

Le Maire tweeted last week: "After the agreement in the Biarritz G7 on digital taxation between France and the United States, we and [OECD Secretary General] Angel Gurría want to accelerate…with one goal: reach an international solution in the OECD in the first half of 2020."

Achieving an international agreement in this timeframe will not be easy. Political leaders and international institutions have been grappling with the rising challenge of imposing a form of taxation on the economic value created by the act of providing digital services, without having any physical presence in a country.

At EU level, the European Commission had adopted two legislative proposals in 2018, aimed at adapting the existing taxation rules to the digital economy. The first proposal contained the rules regarding corporate taxation of significant digital presence and was designed to amend corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital platforms or channels. This suggestion is a long-term solution, according to the Commission. The second proposal for a Council Directive on the common system of revenues resulting from the provision of certain digital services ("digital services tax" or DST), was intended to be an interim tax; Member States would have to implement and apply this DST to cover particular digital activities that generate revenues in the EU.

To recall, the DST is an indirect tax with a rate of 3% on revenue derived from providing qualifying digital services within the EU: publishing online advertisements directed at users of a digital platform, selling of user data, offering digital platforms that expedite the interaction between users and the transfer of goods and services between users. Tax revenues would be collected by the Member States where the users are located, and would only apply to companies with total annual global revenues of €750 million and EU revenues of €50 million.

The DST is intended to be a temporary measure in anticipation of a long-term set of rules that should alleviate the possibility of double taxation. It is supposed to amend the rules on branch taxation, in order to levy companies with a "significant digital presence" in EU Member States, regardless as to whether the company has "offline substance" such as buildings or people in the Member States.

On 12 March 2019 the Economic and Financial Affairs Council of the EU had been unable to reach an agreement on the EU DST during the negotiations on this legislative proposal. It has now been put on hold. An unanimous vote is required in order to adopt the EU directives regarding direct taxation. Some Member States had principal objections against the DST proposal or on some specific aspects of the proposal, resulting in the failure to adopt the legislation earlier this year.

Even though the OECD is working on an international solution for digital taxation, some countries have recently taken unilateral measures to adopt a digital services tax in a form that looks much like the DST e.g. the UK, France, Spain, Italy, and Belgium. Beyond the EU, some countries have either implemented e.g. Turkey and India, or are considering similar measures.

Such implementation of a digital services tax at national level could result an overload of compliance and possibly double tax. Another consequence of the new legislation could be seen in the recent tensions between France and the United States. At the end of the G7 summit on 26 August, 2019, French President Emmanuel Macron stated that France and the United States had reached a deal to end the standoff over a French digital tax. U.S. President Donald Trump had threatened earlier to impose a tariff on the export of French wine, after France passed a law that introduce a 3% tax on revenues derived from digital services in France.

The two leaders have agreed that France would repay companies the difference between its digital tax and the planned taxes that the OECD will draw up, once the OECD has introduced an international solution. It is now up to the OECD, European countries and the U.S. to continue the negotiations and align the international approach with the countries that have already taken action to tax the online profits.

For further information, contact: Willem Bongaerts & Sharada Dhalganjansing