Considerations on COM(2018)148 - Common system of a digital services tax on revenues resulting from the provision of certain digital services

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dossier COM(2018)148 - Common system of a digital services tax on revenues resulting from the provision of certain digital services.
document COM(2018)148 EN
date March 21, 2018
 
(1) The global economy is rapidly becoming digital and, as a result, new ways of doing business have emerged. Digital companies are characterised by the fact that their operations are strongly linked to the internet. In particular, digital business models rely to a large extent on the ability to conduct activities remotely and with limited or no physical presence, on the contribution of end-users to value creation, and on the importance of intangible assets.

(2) The current corporate taxation rules were mainly developed during the 20th century for traditional businesses. They are based on the idea that taxation should take place where value is created. However, the application of the current rules to the digital economy has led to a misalignment between the place where profits are taxed and the place where value is created, notably in the case of business models heavily reliant on user participation. It has therefore become evident that the current corporate tax rules for taxing the profits of the digital economy are inadequate and need to be reviewed.

(3) That review constitutes an important element of the Digital Single Market 24 , given that the Digital Single Market needs a modern and stable tax framework for the digital economy to stimulate innovation, tackle market fragmentation and allow all players to tap into the new market dynamics under fair and balanced conditions.

(4) In its Communication 'A Fair and Efficient Tax System in the European Union for the Digital Single Market' 25 adopted on 21 September 2017, the Commission identified the challenges that the digital economy posed for existing tax rules, and committed to analyse the policy options available. The ECOFIN Council conclusions of 5 December 2017 26 invited the Commission to adopt proposals responding to the challenges of taxing profits in the digital economy, while taking note also of the interest expressed by many Member States for temporary measures aimed at revenues resulting from digital activities in the Union that would remain outside the scope of double tax conventions.

(5) Given the problem of taxing the digital economy is of a global nature, the ideal approach would be to find a multilateral, international solution to it. The Commission is actively engaged in the international debate for that reason. Work at the OECD is currently ongoing. However, progress at international level is challenging. Hence, action is being taken to adapt the corporate tax rules at Union level 27 and to encourage agreements to be reached with non-Union jurisdictions 28 , so that the corporate tax framework can be made to fit the new digital business models.

(6) Pending such action, which may take time to adopt and implement, Member States face pressure to act on this issue, given the risk that their corporate tax bases are being significantly eroded over time. Uncoordinated measures taken by Member States individually can fragment the Single Market and distort competition, hampering the development of new digital solutions and the Union's competitiveness as a whole. This is why it is necessary to adopt a harmonised approach on an interim solution that will tackle this issue in a targeted way until a comprehensive solution is in place.

(7) That interim solution should establish the common system of a digital services tax ('DST') on revenues resulting from the supply of certain digital services by certain entities. It should be an easy-to-implement measure targeting the revenues stemming from the supply of digital services where users contribute significantly to the process of value creation. Such factor (user value creation) also underpins the action with respect to corporate tax rules, as described in recital (5).

(8) The following elements of DST should be defined: the taxable revenues (what is taxed), the taxable person (who is taxed), the place of taxation (what proportion of taxable revenues is deemed to be obtained in a Member State and when), chargeability, calculation of the tax, rate, and related obligations including a One-Stop-Shop collection mechanism.

(9) DST should be applied to revenues resulting from the provision of certain digital services only. The digital services should be ones that are largely reliant on user value creation where the difference between the place where the profits are taxed and the place where the users are established is typically greatest. It is the revenues obtained from the processing of user input that should be taxed, not the user participation in itself.

(10) In particular, taxable revenues should be those resulting from the provision of the following services: (i) the placing on a digital interface of advertising targeted at users of that interface; (ii) the making available of multi-sided digital interfaces which allow users to find other users and to interact with them, and which may also facilitate the provision of underlying supplies of goods or services directly between users (sometimes referred to as 'intermediation' services); and (iii) the transmission of data collected about users and generated from such users' activities on digital interfaces. If no revenues are obtained from the supply of such services, there should be no DST liability. Other revenues obtained by the entity providing such services but not directly stemming from such supplies should also fall outside the scope of the tax.

(11) Services consisting in the placing on a digital interface of a client's advertising targeted at users of that interface should not be defined by reference to who owns the digital interface through which the advertising appears on a user's device, but rather by reference to the entity responsible for enabling the advertising to appear on that interface. This is because the value for a business placing a client's advertising on a digital interface lies with user traffic and the user data which is typically taken into account for the purposes of the placement, regardless of whether the interface belongs to the business itself or to a third party who is renting out the digital space where the advertisement will appear. However, it should be clarified that in cases where the supplier of the advertising service and the owner of the digital interface are different entities, the latter should not be considered to have provided a taxable service for DST purposes. This is in order to avoid possible cascading effects and double taxation.

(12) Services provided by multi-sided digital interfaces should be defined by reference to their capacity to enable users to find other users and to interact with them. The differential aspect of multi-sided digital interfaces is that they allow a user interaction which could not take place without the interface matching users with each other (in other words, the interface allows users to get in touch with other users). Some services typically referred to as communication or payment services, such as instant messaging services, e-mail services or e-payment services, may also be seen as facilitating the interaction between users through a digital interface, but users cannot usually get in touch with each other unless they have already established contact by other means. The revenues resulting from the supply of communication or payment services should therefore remain outside the scope of the tax because such suppliers do not operate as a marketplace, but rather produce support software or other information technology instruments allowing customers to reach out to other persons with whom they already have a relationship in most cases.

(13) For cases involving multi-sided digital interfaces that facilitate an underlying supply of goods or services directly between users of the interface, the underlying transactions and the revenues obtained by users from those transactions should remain outside the scope of the tax. The revenues resulting from retail activities consisting in the sale of goods or services which are contracted online via the website of the supplier of such goods or services, and where the supplier does not act as an intermediary, should also be outside the scope of DST because the value creation for the retailer lies with the goods or services provided and the digital interface is only used as a means of communication. Whether a supplier is selling goods or services online on his own account or providing intermediation services would be determined by taking into account the legal and economic substance of a transaction, as reflected in the arrangements between the relevant parties. For instance, a supplier of a digital interface where third-party goods are made available could be said to provide an intermediation service (in other words, the making available of a multi-sided digital interface) where no significant inventory risks are assumed, or where it is the third party effectively setting the price of such goods.

(14) Services consisting in the supply of digital content by an entity through a digital interface should be excluded from the scope of the tax, regardless of whether the digital content is owned by that entity or that entity has acquired the rights to distribute it. Even if some sort of interaction between the recipients of such digital content may be allowed and therefore the supplier of such services could be seen as making available a multi-sided digital interface, it is less clear that the user plays a central role in the creation of value for the company supplying the digital content. Instead, the focus from the perspective of value creation is on the digital content itself which is supplied by the entity. Therefore the revenues obtained from such supplies should fall outside the scope of the tax.

(15) Digital content should be defined to mean data supplied in digital form, such as computer programmes, applications, games, music, videos or texts, irrespective of whether they are accessed through downloading or streaming, and other than the data represented by a digital interface itself. This is to capture the different forms which digital content can take when acquired by a user, which does not alter the fact that the sole or main purpose from the user's perspective is the acquisition of the digital content.

(16) The service described in recital (14) should be distinguished from a service consisting in the making available of a multi-sided digital interface through which users can upload and share digital content with other users, or the making available of an interface that facilitates an underlying supply of digital content directly between users. These latter services constitute a service of intermediation and should therefore fall within the scope of DST, regardless of the nature of the underlying transaction.

(17) Taxable services consisting in the transmission of data collected about users should cover only data which has been generated from such users' activities in digital interfaces, but not data which has been generated from sensors or other means and collected digitally. This is because the services within the scope of DST should be those using digital interfaces as a way to create user input which they monetise, rather than services using interfaces only as a way to transmit data generated otherwise. DST should therefore not be a tax on the collection of data, or the use of data collected by a business for the internal purposes of that business, or the sharing of data collected by a business with other parties for no consideration. What DST should target is the generation of revenues from the transmission of data obtained from a very specific activity (users' activities on digital interfaces).

(18) Services regulated in points (1) to (9) of Section A of Annex I to Directive 2014/65/EU of the European Parliament and of the Council 29 and provided by trading venues or systematic internalisers, as defined in that Directive, or by regulated crowdfunding service providers should not fall within the scope of DST. In addition, services consisting in the facilitation of the granting of loans and provided by regulated crowdfunding service providers should not fall within the scope of DST. Regulated crowdfunding service providers refers to providers of services who are subject to any future Union rules adopted under Article 114 of the TFUE for the regulation of crowdfunding services.

(19) Multi-sided digital interfaces which allow users to receive or to know about the existence of trade execution services, investment services or investment research services, such as those made available by the entities referred to above, often imply user interaction. However, the user does not play a central role in the creation of value for the entity making available a digital interface. Instead, the value lies with the capacity of such an entity to bring together buyers and sellers of financial products under specific and distinctive conditions which would not occur otherwise (compared, for instance, to transactions concluded outside such interfaces directly between the counterparties). A service consisting in making available a digital interface by such an entity goes beyond the mere facilitation of transactions in financial instruments between users of such an interface. In particular, the regulated services which are excluded from the scope of this Directive aim at providing a safe environment for financial transactions. The entity providing these services therefore determines the specific conditions under which such financial transactions can be executed in order to guarantee essential elements such as the quality of execution of the transactions, the level of transparency in the market and fair treatment of investors. Finally, such services have the essential and distinct objective of facilitating funding, investments or savings.

(20) As regards crowdfunding platforms, investment and lending based crowdfunding should be outside the scope of the tax since the providers of such services play the same role as that of trading venues and systematic internalisers, and hence do not constitute intermediation. However, services provided by crowdfunding platforms which are not investment and lending based and constitute intermediation, such as donation or reward based crowdfunding, or services provided by such platforms consisting in the placing of advertising, should fall within the scope of this Directive.

(21) Since data transmission by trading venues, systematic internalisers and regulated crowdfunding service providers is limited to and forms part of the provision of the regulated financial services described above and is regulated as such under Union law, the provision of data transmission services by those entities should also be excluded from the scope of DST.

(22) Only certain entities should qualify as taxable persons for the purposes of DST, regardless of whether they are established in a Member State or in a non-Union jurisdiction. In particular, an entity should qualify as a taxable person only if it meets both of the following conditions: (i) the total amount of worldwide revenues reported by the entity for the latest complete financial year for which a financial statement is available exceeds EUR 750 000 000; and (ii) the total amount of taxable revenues obtained by the entity within the Union during that financial year exceeds EUR 50 000 000.

(23) The first threshold (total annual worldwide revenues) should limit the application of DST to the companies of a certain scale, which are the ones mainly able to provide those digital services for which user contribution plays a fundamental role, and which heavily rely on extensive user networks, large user traffic, and the exploitation of a strong market position. Such business models, which depend on user value creation for obtaining revenues and are only viable if carried out by companies with a certain size, are the ones responsible for the higher difference between where their profits are taxed and where value is created. Moreover, the opportunity of engaging in aggressive tax planning lies with larger companies. That is why the same threshold has been proposed in other Union initiatives 30 . Such a threshold is also intended to bring legal certainty, given that it would make it easier and less costly for companies and tax authorities to determine whether an entity is liable to DST. It also excludes small enterprises and start-ups for which the compliance burdens of the new tax would be likely to have a disproportionate effect.

(24) The second threshold (total annual taxable revenues in the Union) should limit the application of the tax to cases where there is a significant digital footprint at Union level in relation to the type of revenues covered by DST. It should be set at Union level in order to disregard differences in market sizes which may exist within the Union.

(25) To comply with the existing legal framework, any entity qualifying as a taxable person and obtaining taxable revenues treated as obtained in a Member State should be subject to DST in that Member State, irrespective of whether that entity is established in that Member State, in another Member State or in a non-Union jurisdiction.

(26) Special rules should be set out for entities belonging to a consolidated group for financial accounting purposes. The revenues obtained by an entity from supplies to other entities belonging to the same group for financial accounting purposes should be excluded from the scope of the new tax. For the purposes of determining whether an entity is above the applicable thresholds and thus qualifies as a taxable person, the thresholds should be applied in respect of total consolidated group revenues.

(27) In order to alleviate possible cases of double taxation where the same revenues are subject to the corporate income tax and DST, it is expected that Member States will allow businesses to deduct the DST paid as a cost from the corporate income tax base in their territory, irrespective of whether both taxes are paid in the same Member State or in different ones.

(28) The taxable revenues of an entity should be treated as obtained in a Member State in a tax period if the users with respect to a taxable service provided by that entity are located in that Member State. A user should be deemed to be located in a Member State in a tax period on the basis of certain specific rules, determined for each of the taxable services and based on the place where a user's device has been used.

(29) Where the users with respect of a given taxable service are located in different Member States or non-Union jurisdictions, the relevant taxable revenues obtained from that service should be allocated to each Member State in a proportional way on the basis of certain specific allocation keys. Such keys should be set out depending on the nature of each taxable service and the distinctive elements triggering the receipt of revenues for the provider of such a service.

(30) In the case of a taxable service consisting in the placing of advertising on a digital interface, the number of times an advertisement has appeared on users' devices in a tax period in a Member State should be taken into account for the purposes of determining the proportion of taxable revenues to be allocated in that tax period to that Member State.

(31) As regards the making available of multi-sided digital interfaces, in order to determine the proportion of taxable revenues to be allocated to a Member State, a distinction should be made between cases where the interface facilitates underlying transactions directly between users and cases where it does not. In cases involving the facilitation of underlying transactions, the allocation of taxable revenues in a tax period to a Member State should be carried out on the basis of the number of users who conclude such a transaction in that tax period while using a device in that Member State. This is because that is the action usually generating revenues for the business making the interface available. Taxing rights over the revenues of the business making available the interface should be allocated to Member States where the users concluding underlying transactions are located, whether the users are the sellers of the underlying goods or services or the buyers. This is because both of them generate value for the multi-sided digital interface through their participation, given that the role of the interface is to match supply and demand. However, if the intermediation service does not involve the facilitation of underlying transactions, revenues are typically obtained through periodic payments after having registered or opened an account on a digital interface. Hence, for the purposes of allocating taxable revenues to a Member State in a tax period, the number of users in that tax period holding an account which was opened using a device in that Member State, whether opened during that tax year or an earlier one, should be taken into account.

(32) As regards the transmission of data collected about users, the allocation of taxable revenues in a tax period to a Member State should take into account the number of users from whom data transmitted in that tax period has been generated as a result of such users having used a device in that Member State.

(33) Identifying the place where a user's device has been used and, therefore, the place of taxation should be possible due to the Internet Protocol (IP) address of the user's device or, if more accurate, other means of geolocation. The place of taxation should not take into account whether users have contributed in money to the generation of the revenue, the place from where the payment in exchange for the supplies giving rise to a DST liability has been made, or the place where a possible supply of underlying goods or services contracted via a multi-sided digital interface has been made.

(34) Any processing of personal data carried out in the context of DST should be conducted in accordance with Regulation (EU) 2016/679 of the European Parliament and of the Council 31 , including that which may be necessary in relation to Internet Protocol (IP) addresses or other means of geolocation. In particular, regard should be given to the need to provide appropriate technical and organisational measures to comply with the rules relating to the lawfulness and security of processing activities, the provision of information and the rights of data subjects. Whenever possible, personal data should be rendered anonymous.

(35) The taxable revenues should be equal to the total gross revenues obtained by a taxable person, net of value added tax and other similar taxes. Taxable revenues should be recognised as obtained by a taxable person at the time when they become due, regardless of whether they have actually been paid by then. DST should be chargeable in a Member State on the proportion of taxable revenues obtained by a taxable person in a tax period that is treated as obtained in that Member State, and should be calculated by applying the DST rate to that proportion. There should be a single DST rate at Union level in order to avoid distortions in the Single Market. The DST rate should be set at 3%, which achieves an appropriate balance between revenues generated by the tax and accounting for the differential DST impact for businesses with different profit margins.

(36) Taxable persons providing taxable services should be liable for the payment of DST, as well as responsible to fulfil a series of administrative obligations. A simplification mechanism in the form of a One-Stop-Shop (OSS) should be set up for taxable persons with DST liability in one or more Member States, so that all their DST obligations can be fulfilled at once (identification, submission of the DST return, and payment). The obligations should be fulfilled in a single Member State (Member State of identification), which should collect the information and the payment of the DST on behalf of other Member States where the DST is due, and subsequently share that relevant information and the collected DST amounts with them. Such a mechanism is without prejudice to DST being owed by the taxable person directly to each Member State where DST is due. Accordingly, each Member State where DST is due should be entitled to enforce payment of DST directly against the taxable person liable for it, as well as to carry out tax audits and control measures aimed at examining a taxable person's DST liability. Such enforcement and control measures should be governed by the rules and procedures applicable in each Member State where DST is due.

(37) Member States should be able to lay down accounting, record-keeping or other obligations aimed at ensuring that the DST due is effectively paid, as well as other measures to prevent tax evasion, avoidance and abuse.

(38) In order to ensure uniform conditions for the implementation of this Directive as regards the administrative obligations to be fulfilled and the exchanges of information between Member States necessary for the functioning of the OSS, implementing powers should be conferred on the Commission. The Commission should also be able to propose common rules concerning accounting, record-keeping or other obligations to be laid down by Member States. Those powers should be exercised in accordance with Regulation (EU) No182/2011 of the European Parliament and of the Council 32 .

(39) Member States should, wherever necessary, make use of the provisions adopted by the Union regarding administrative cooperation in tax matters such as Council Directives 2011/16/EU 33 and 2010/24/EU 34 , or of other measures available internationally, such as the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, Article 26 of the OECD Model Tax Convention and the OECD Model Agreement on Exchange of Information in Tax Matters.

(40) In accordance with the Joint Political Declaration of 28 September 2011 of Member States and the Commission on explanatory documents 35 , Member States have undertaken to accompany, in justified cases, the notification of their transposition measures with one or more documents explaining the relationship between the components of a directive and the corresponding parts of national transposition instruments. With regard to this Directive, the legislator considers the transmission of such documents to be justified.

(41) The objectives of this Directive aim at protecting the integrity of the Single Market, ensuring its proper functioning and avoiding distortion of competition. Since those objectives, by their very nature, cannot be sufficiently achieved by Member States but can rather be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance of proportionality, as set out in that Article, this Directive does not go beyond what is necessary in order to achieve those objectives.