Proposals on the Taxation of the Digital Economy by the EC
On 21 March, the European Commission issued its proposals on the taxation of the digital economy. The proposals contain a number of parts with the most important of them being the suggestion for a Directive.
The proposal contains two new draft EU Directives, the first Directive is an all-inclusive long-term solution and the second is an interim solution to quickly address the issue.
The draft Directive on the corporate taxation of an important digital presence
This suggested Directive represents an (long-term) all-inclusive solution within the corporate tax systems of the Member States. It states rules for establishing a taxable link in case of a nonphysical commercial presence of a digital business:
The part of total income gained in that tax period and resulting from the supply of those digital services to users located in that Member State in that tax period exceeds EUR 7.000.000
The number of users of one or more of those digital services who are situated in that Member State in that tax period exceeds 100.000
The number of business contracts for the supply of any such digital service that are concluded in that tax period by users situated in that Member State exceeds 3.000
Furthermore, the profit split method should be the default unless the taxpayer can prove that there is another method which is more appropriate based on the findings of the functional analysis.
The suggested Directive shall apply to all taxpayers that are subject to corporate tax in one or more Member States and to entities resident for tax purposes in a non-EU jurisdiction, in regards to their significant digital presence in a Member State.
The EC suggests that the Directive to apply as of 1 January 2020.
The EC’s Suggestion regarding the corporate taxation of a significant digital presence
In the cases where the proposed Directive mentioned above would not apply, the EC’s Suggestion determines how Member States should change their DTCs with non-EU jurisdictions to reflect a significant digital presence, and assignment of profits thereto as per the above Directive.
The draft Directive on the common system of a digital services tax on revenues
This second suggested Directive represents an interim solution. It introduces a Digital Services Tax (DST) at EU level at a rate of 3% on gross revenue (net of VAT and other similar taxes) resulting in the EU by the following activities (certain exceptions are applicable):
The placing on a digital interface of advertising targeted at users of that interface
The making available to users of a multi-sided digital interface which lets users to find other users and to network with them, and which may also enable the provision of primary supplies of goods or services directly between users
The forwarding of data gathered about users and created from users' activities on digital interfaces
Only entities with both total annual worldwide (i.e. not only within the EU) income above €750mn and total annual taxable digital revenues in the EU above €50mn would be subject to the DST, regardless of whether they are incorporated in a Member State or in a non-EU jurisdiction.