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Digital Services Tax
A look at the EC's proposed 'Digital Services Tax'
The development of technologies that facilitate large scale cross-border trade is placing considerable strain on the present international tax framework. The tax challenges arising from digitalisation are viewed as a primary cause of concern in global efforts to maintain an equitable and balanced allocation of taxing rights between jurisdictions.
The OECD and the European Commission, both of which are key drivers in international tax policy, maintain that the present international tax framework is not well-suited to the contemporary reality whereby businesses are able to achieve cross-jurisdictional scale without the need to establish a physical presence outside their state of establishment and rely heavily on the harvesting and systematic refinement of user data to optimise their service offerings.
On 21 March 2018, the European Commission proposed new rules, taking the form of two proposals for Directives, which are targeted at highly-digitalised businesses. The first proposal aims to reform corporate tax rules so that profits are recognised and taxed where businesses have significant interaction with users through digital channels. The second proposal responds to calls from several Member States for an interim tax which covers the main digital activities that, according to the European Commission, currently escape tax altogether in the European Union.
The second proposal is colloquially being referred to as a ‘digital services tax’ (‘DST’) and would take the form of 3% tax on gross revenues derived from the provision of specified services by qualified persons. The proposal targets taxpayers of considerable scale (individual entities or consolidated groups with (i) annual worldwide revenues exceeding EUR 750,000,000, or (ii) taxable revenues derived from within the European Union exceeding EUR 50,000,000), and is limited to revenues derived from specified services, in particular:
- revenues derived from the placing of targeted advertising;
- revenues derived from the offering of multi-sided digital platforms to users; and
- revenues derived from the transmission of data collected about users and generated from users activities on digital interfaces.
The broad drafting of the proposal could result in a considerable cost for taxpayers in the digital sphere. Operators and affiliates active in the remote gaming industry should remain vigilant of any relevant legislative developments in order to adequately anticipate and manage future compliance obligations. Should you be interested in learning how the proposal for a DST may impact your business, kindly contact us.