What is the future of taxation of digital economy?

The question of fair taxation of digital economy is a hot topic. After the informal ECOFIN meeting in Tallinn, held on 21 September 2017, the European Commission (EC) launched a new EU agenda to tax the digital industry in a fair and growth-friendly way. On 22 March 2018, the EC presented their proposal for two new EU directives:

• Proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence, and
• Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services

Digital presence

A digital service was defined as a service that is delivered over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention.

The mere sale of goods or services facilitated by using the internet or an electronic network is not regarded as a digital service. The Proposal provides for the following example: giving access (for remuneration) to a digital marketplace for buying and selling cars is a digital service, but the sale of a car itself via such a website is not.

For the purposes of corporate tax, a permanent establishment shall be taken to exist if a significant digital presence exists through which a business is wholly or partly carried on. There will be a significant digital presence in a Member State if one or more of the following criteria are met:

• the revenues from providing digital services to users in a jurisdiction exceed EUR 7 000 000 in a tax period; or
• the number of users of a digital service in a Member State exceeds 100 000 in a tax period; or
• the number of business contracts for digital services exceeds 3 000.

A significant digital presence should be attributed the profits that it would have earned through certain significant economic activities performed via a digital interface.

The revenues included in the scope of this Directive (taxable revenues) would be those derived from the provision of any of the following services:

• services consisting in the placing on a digital interface of advertising targeted at users of that interface; as well as the transmission of data collected about users which has been generated from such users' activities on digital interfaces;
• services consisting in the making available of multi-sided digital interfaces to users, which may also be referred to as "intermediation services", 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.

Services by an entity to users through a digital interface consisting in the supply of digital content such as video, audio or text, either owned by that entity or which that entity has acquired the rights to distribute, are not to be regarded as intermediation services and should therefore be excluded from the scope of the tax.

Revenues from digital services

It was proposed that Digital Services Tax would be levied on the gross revenues of a business resulting from the provision of the services falling within the scope of the tax, net of value added tax and other similar taxes. Revenues resulting from the provision of taxable services between entities of a consolidated group for financial accounting purposes will not qualify as taxable revenues.

An entity exceeding both of the following thresholds will qualify as a taxable person for the purposes of the Digital Services Tax:

• 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
• the total amount of taxable revenues obtained by the entity within the European Union during that financial year exceeds EUR 50 000 000.

The Digital Services Tax will be due in the Member State or Member States where the users are located.

A single tax rate across the European Union of 3% was proposed.

For more information on this topic please refer to the publication prepared by KPMG International.