The EU is proposing a 3% tax on certain revenue earned by EU-based digital-service companies.
In a recent package of proposals, the EU introduced a long-term plan to eventually tax digital businesses operating within the EU that have no (or only a limited) physical presence. This EU report follows the OECD's recent release of its own interim report, "Tax Challenges Arising from Digitalization", which provides an in-depth analysis of digitalized business models but does not introduce or recommend any interim measures.
EU's proposed digital tax strategy
The EU's report introduces its long-term digital tax strategy based on a new digital "permanent establishment" concept. According to Fair and Effective Taxation of the Digital Economy, released on March 21, 2018, under the proposed regime businesses with a significant digital presence in an EU member state would be taxed under that state's normal corporate income tax system. In the interim, the EU proposes a new EU Digital Services Tax to apply beginning January 1, 2020, at the single rate of 3% on gross revenues. It is expected that the digital sales tax would not apply to entities located in countries that comply with the the digital permanent establishment concept, once it comes into force.
The proposals will now be submitted to the European Parliament for consultation and to the Council for adoption by unanimity.
EU digital service tax
The proposed new 3% tax would apply to revenue from certain services, including selling online advertising space, creating certain online marketplaces, and transmitting collected user data. This tax would only apply to businesses that cumulatively meet certain thresholds (i.e., entities with a total annual worldwide revenue above EUR 750 million and a total annual revenue stemming from digital services in the EU above EUR 50 million).
The tax would not apply to regulated crowd funding services, trading venues, or those who supply digital content or payment services.
The digital services tax would be owed to tax authorities in member states where the businesses' users are located and allocation rules would apply to attribute the tax base between member states if its users are located in more than one state.
Under the proposal, taxpayers may deduct the tax from their corporate income tax liability.
EU digital permanent establishment
The proposed EU "digital permanent establishment" tax regime would affect EU enterprises as well as those established in non-EU jurisdictions that do not have a double tax treaty with the affected EU member state. Specifically, it would affect businesses that provide certain digital services that have a "significant digital presence" in EU member states, and that have a digital platform with either:
OECD's digital tax interim report
The OECD recently released an interim report addressing tax challenges arising out of the digital economy and builds on its BEPS report under Action 1. The report does not recommend introducing any new interim measures at this time, although it does provide guidance for jurisdictions that are considering immediate action. Within the report, the OECD says it would be difficult or impossible to fence the digital economy off from the rest of the economy as a whole.
The interim OECD report was published on March 16, 2018, and is the result of a consensus reached between more than 110 member countries. It presents an in-depth analysis of the different digitalized business models and describes a number of their common characteristics, such as a wide digital footprint with no or only a limited physical presence, heavy reliance on intangible assets and the importance of data and user participation.
The OECD report will be updated again by 2019, with the aim of working towards a consensus-based solution in 2020 for finding a long-term solution for the taxation of the digital economy.
The UK also released an update to its position paper on taxing the digital economy, originally issued in November 2017, and launched additional consultations in this area as part of its Spring Statement on March 13, 2018.
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