Belgium – Bill on a temporary Digital Services Tax

International developments

Globally, recent developments in tax legislation have sought to align as closely as possible the place where the tax bill is due with the place in which a proportionate part of the activity's economic value has been created. Such objective has however proved painstakingly difficult when it comes to the digitalized economy as traditional tax jurisdiction rules are ill-suited to deal with such business models.

When applied to the digital economy, current corporate income tax rules, which mostly rely on physical presence to determine the relevant tax jurisdiction, seem outdated as they do not allow a fair taxation of the profits raised through business models which involve digital services relying heavily on user participation.

Indeed, in such situation, it is often the case that no tax may be collected in the jurisdictions where the actual value is created, i.e. the countries of residence of the end-users.

The OECD discussions for an harmonized approach to the taxation of the digital economy, i.e. its "2-pillar approach to address the tax challenges arising from the digitalisation of the economy", aim at allowing countries to have some rights to tax profits on the basis of sales made in their jurisdictions ("Pillar 1") on the one hand, and introducing a global minimum corporate tax rate to prevent countries lowering corporate tax rates to attract company HQs to their jurisdictions ("Pillar 2") on the other hand. A consensus has yet to be reached on either pillar but the organization remains hopeful of reaching a deal in late 2020 (see below for a full picture however) and plans to resume talks in this regard in October 2020.

The EU, which had failed to introduce a similar tax on its own in 2018, vowed on its part to revisit its proposal should no progress be made at OECD-level by the end of 2020.

Belgian 2019 bill on DST put back on the table

Following in the footsteps of some European neighbours (i.e. amongst others France, the UK & Spain), a bill seeking to address this situation at national level was put forward last year by 3 members of the Belgian Federal Parliament and was discussed again on 15 June. The said bill seeks to create a Digital Services Tax ("DST") which would apply to undertakings whose turnover relating to "digital services" (i.e. products from advertising targeting users, from software and applications and from the use of big data) exceeds 750 million euros worldwide and 5 million euros at Belgian level (i.e. when the "digital services" profits relate to end-users who are Belgian tax residents). Such undertakings will need to comply with certain disclosure obligations and be liable to a 3% Belgian tax on the profits deriving from the "digital services" involving Belgian tax residents.

It seems that the bill currently has a slight majority of backers within Parliament. Even if the hurdles spotted by the Council of State are overcome or bear no consequences, it remains uncertain whether such bill will be adopted given its potentially thorny nature at international level (see below).

Finally, it is worth mentioning that in any case, the said bill contains a "sunset clause", providing that it will only remain in force until an agreement at EU- or OECD-level becomes applicable.

Right time?

It remains to be seen if the time is ripe for such unilateral measures, even if temporary in nature, as the main actor behind the deadlock in international negotiations does not seem to be particularly keen on local initiatives either.

In late January 2020, France agreed to put on hold all tax debt recovery related to its DST (which was enacted the previous year and amassed EUR 280 million for its first annual application) in order to avoid a trade war with the US who houses most of the potential taxpayers (e.g. the leading digital companies such as GAFA, Netflix, Microsoft, etc.). Actually, the US pledged to use retaliatory tariffs not only on typical French products such as Camembert cheese, wine and champagne, but also on German cars or Italian parmesan cheese in order to discourage local implementation of such laws.

Currently, investigations of potential discrimination against US companies are being conducted by the US Trade representative against the adopted/contemplated DSTs of 9 countries, as well as the European Union's project. Public comments in this regard should be shared around 15 July 2020. If the investigations conclude that the taxation constitutes unfair trade practices, US Law would then permit the unilateral application of additional tariffs on imports from the countries involved. In the meantime, the US Treasury Secretary asked the OECD to "pause discussions of Pillar 1, with a view towards resuming later this year […]", effectively halting plans for a new global tax framework targeted at the biggest actors of the digital economy.

But overall a good idea?

Well, there are a number of concerns, aside from bad timing, related to the expected boost of government budget. As Belgium is a country thriving on export, tariff sanctions (such as the ones threatened by the US) may seriously impact Belgian exporting companies, hence generating less revenue to be taxed in Belgium. In addition, as the bearing of the DST cost will likely be passed on to the taxpayers' customers, the latter may find their way to other digital markets not hindered by a DST and thus harm the Belgian digital market.