European Parliament rapporteur Paul Tang recommends a 5% tax on digital services - Main contents

The draft report for the opinion by Paul Tang (S&D, Netherlands) on the European Commission’s proposal for a 3% tax on the gross earnings of the activities of digital platforms (‘digital services tax’ or DST) is good to go. It will be discussed by the committee on economic and monetary affairs of the European Parliament on Tuesday 9 October.

The Dutch MEP, who is in favour of introducing a temporary measure, supports the bulk of the Commission’s proposal and, in particular, shares the view that the tax should be limited to companies with a total turnover greater than €750 million “to limit a negative impact on the development of small companies”.

Of the changes suggested, the first - and not the least - is to increase the tax to 5%, compared to the 3% proposed by the Commission. In his draft report, he explains that this change would help to create a “level playing field”, by bridging the gap between the taxation rate of traditional and digital enterprises.

Tang goes on to explain why. The Commission based its proposed rate on the idea of an implied tax of profits, he explains, but it underestimated the actual share of the digital sector. For instance, when the rate was set, a low profitability of 15% for these companies was presumed, whereas a profit margin of 25% would be more realistic, he considers.

“Large digital multinational companies like Facebook and Google tend to have profit margins of up to 40%”, he points out.

Five categories of taxable earnings. The MEP also proposes to extend the scope of application of the DST. As well as applying it to online advertising, intermediation services and the sale of data, he considers that the DST should also cover video, audio or text content using a digital interface as well as the sale of goods or services online via e-commerce platforms.

He goes on to recommend that the text clearly state that the DST should apply to the sale and transmission of data obtained from users’ active participation in digital interfaces.

Readers may recall that the Council is in fact looking into reducing the scope of application (see EUROPE 12089). In early September, for instance, the Austrian Presidency of the Council of the EU sounded out the member states on the possibility of excluding the sale of data, to the satisfaction of countries such as Germany.

Sunset clause. It is worth noting that Tang is also in favour of introducing a ‘sunset clause’, echoing the proposal tabled by France (see EUROPE 12092), clearly stipulating that the DST is only a temporary measure, pending a permanent solution, and that it will expire upon the adoption of rules on significant digital presence or on a common corporate tax base (CCTB) and on a consolidation of such a tax (CCCTB).

Tang also recommends the introduction of an audit mechanism by the Commission in the event that a taxpayer is liable for the DST in more than one member state. He considers that the Commission should also re-examine the directive three years after its enter into force, to assess whether the various thresholds and scope of application are still appropriate.