On 21 March 2018, the European Commission (EC) issued a package of rules on taxation of digital activities in the European Union (EU). It includes:
- a proposal for a European Council Directive establishing rules relating to the corporate taxation of a significant digital presence;
- a proposal for a European Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services;
- Commission Recommendation relating to the corporate taxation of a significant digital presence;
- the Commission's Communication to the European Parliament (EP) and the European Council entitled “Time to establish a modern, fair and efficient taxation standard for the digital economy.”
We present below the most important aspects set out in the EC's package of measures on taxing digital activities in the EU.
Proposal for a European Council Directive establishing rules relating to the corporate taxation of a significant digital presence
- It seeks to tax profits generated from a Member State (MS) even if the company does not have a physical presence in that MS. Thus, it extends the notion of permanent establishment to include cases of a business carried on through a significant digital presence. A company providing digital services through a digital interface has a significant digital presence in a MS if it meets at least one of the following conditions, in aggregate with its associated enterprises:
- The annual revenues from digital services supplied to users in a Member State exceed EUR 7 million;
- The number of users of digital content in a Member State exceed 100,000 in a tax year;
- The number of business contracts for digital services concluded with users in a MS exceed 3,000 in a tax year.
- Introduces new rules on the profit attribution to the permanent establishment, with the fundamental principle being that taxation should occur where the value is created. The allocation of profits to the permanent establishment should be based on a functional analysis, with additional specific criteria for identifying the economically significant activities for a digital company (eg. collection, storage, processing, display of data, sale of online advertising space etc.) considered.
The deadline for transposing the provisions is 31 December 2019, with applicability as of 1 January 2020.
This proposal is the Commission's long-term preferred solution.
It is also intended to implement these rules in the Common Consolidated Corporate Tax Base Directive (CCCTB) - an initiative already proposed by the EC and adopted by the European Parliament (EP) - which we presented HERE
Proposal for a European Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services
- Introduces a single digital tax (DST) to be applied to revenues from the provision of certain digital services;
- The DST rate is 3% and will apply to the gross revenue resulting from:
- placing on a digital interface advertising targeted at users of that interface;
- making a multi-sided digital interface available to users which allows them to find and interact with other users, and which may also facilitate the provision of underlying supplies of goods or services directly between users;
- transmitting data collected about users and generated from user activities on digital interfaces.
- The tax will apply to all companies meeting both the following conditions:
- Total amount of worldwide revenues reported by the entity for the relevant financial year exceeds EUR 750 million;
- Total amount of taxable digital services revenues obtained by the entity within the EU during the relevant financial year exceeds EUR 50 million.
- Taxpayers subject to DST will have to submit electronically a DST statement for each tax period within 30 working days as of its end.
This proposal is the Commission's short-term solution. The explanatory memorandum of this initiative mentions the establishment of a simplification mechanism, following the one-stop-shop model already in place.
Commission Recommendation to amend double tax treaties relating to the corporate taxation of a significant digital presence
- Proposes that member states amend double tax treaties (DTTs) concluded with third countries in order to extend the concept of permanent establishment so as to take into account the significant digital presence concept and to include rules on the attribution of profits to such a permanent establishment.
The European Commission has initiated the rules on taxing digital activities in the European Union. The solutions presented are:
- Implementation of a Digital Permanent Establishment Directive, which could be included in the CCCTB Directive (the long-term solution);
- Implementation of an interim tax – the Single Tax on Digital Services (the short-term solution);
- Recommendation that Member States amend their DTTs to implement rules on digital permanent establishments and on the attribution of profits from digital activities.
The legislative proposals included in this package are to be submitted to the European Council for adoption and to the European Parliament for consultation.