European Commission proposes interim tax on digital services, structural changes to PE rules | Deloitte Nederland

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European Commission proposes interim tax on digital services, structural changes to PE rules

On 21 March 2018, the European Commission published a proposal to introduce a tax on gross revenue derived from the provision of certain digital services by companies based on where the revenue is generated, rather than where the company is located.

22 March 2018

European Commission proposes interim tax on digital services, structural changes to PE rules

On 21 March 2018, the European Commission published a proposal to introduce a tax on gross revenue derived from the provision of certain digital services by companies based on where the revenue is generated, rather than where the company is located. This is to be followed by longer-term structural changes to the definition of a permanent establishment (PE) that would permit digital services to create a deemed or virtual PE in a country where a service provider does not have a physical presence. The effective date of the interim rules is scheduled for 1 January 2020.

Background

The European Commission’s proposal is based on the fact that companies offering digital services may pay no or little tax on their profits in the country where the value of the services is created. One reason for this is that the service provider often has no physical presence in the country where the services are performed, which may mean that there is no possibility for that country to tax the related profits. The Commission considers this outcome to be undesirable, and it intends to structurally change the concept of a PE to prevent this result. Specifically, the supply of such services would create a deemed PE—a “digital” or “virtual” PE—linked to specific transfer pricing rules for digital services. These structural changes would take time to implement, so the Commission proposes an interim solution that would tax the gross revenue derived from digital services.

Interim tax on digital services

The proposal acknowledges the difficulties in implementing structural changes in the near future, one reason being their complexity. Thus, the Commission proposes an interim solution: a specific tax on the revenue earned by companies operating in the digital economy, based on the assumption that taxation would take place only in situations involving a significant mismatch “between the taxation of profits and the value creation related to the digital services.” The Commission proposed a directive to implement the tax.

Scope of the tax

The digital services tax proposed to be introduced in the directive would apply to the gross revenue derived from digital services. Hence, no costs would be deductible. The tax would apply to both digital services provided to other companies (B2B services) and services provided to consumers (B2C services)—including intra-EU transactions, transactions within a single EU member state and transactions between member states and non-EU/European Economic Area states (third countries). The following types of digital services would fall within the scope of the tax:

  • Services supplied for consideration that involve the provision of user data collected by means of making available advertising space; and
  • Services supplied for consideration that involve the use of digital platforms/marketplaces (intermediation services), where the users supply goods and/or services directly between themselves.


Services supplied for consideration that involve the provision of digital content/solutions would be beyond the scope of the tax. Companies (regardless of whether they are established in the EU) performing the above services would be subject to the digital services tax if they fulfill the following conditions:

  • Have a total annual worldwide group revenue of at least EUR 750 million; and
  • Have annual EU revenues of at least EUR 50 million.

Place of supply of services

The following rules would apply to determine the place where the services are deemed to be supplied, and where the tax is due:

  • For services involving the provision of user data collected by means of making advertising space available, or the sale of data: Where the advertisement is displayed or where the users that supplied the data that is being sold are located; and
  • For services involving making available digital platforms/marketplaces to users: Where the user paying for access to the platform (or to conclude a transaction within the platform) is located.


In situations where two platform users are involved in an underlying transaction, where they are paying for the use of the platform and where they are resident in different EU member states, the tax would be levied in both member states on the amount of revenue generated in each.

Tax administration

The annual gross revenue derived from digital services would be taxed at a rate of 3%. Thus, individual transactions would not be taxed, and there would be no deductions for costs incurred. It would not be possible to settle any tax levied at an earlier stage of the supply, but the tax would be deductible as an expense item for corporate income tax purposes.

The design of the proposed taxation does not automatically mean that the tax can be qualified as a levy comparable to a value added tax.

Additional reporting requirements would need to be imposed, due to the specific information EU member states would need to levy the digital services tax. A “one-stop-shop” model would be used to collect the information, meaning that all information would need to be provided to only a single member state that subsequently exchange the information with other affected member states.

Longer-term structural changes to taxation of digital services

The structural changes to the taxation of digital services envisaged by the European Commission would require the implementation of both a “digital PE” concept and specific transfer pricing rules for digital services. The Commission aims to implement an EU directive that would require the amendment of the tax treaties concluded between EU member states, and that also would apply to transactions between member states and third countries with which member states have no tax treaty. In cases where there is a tax treaty between an EU member state and a third country, the Commission intends to recommend that the member state applies the measures by amending the tax treaty.

According to the European Commission, these structural tax changes should be reflected in the proposal for a Common Consolidated Corporate Tax Base (CCCTB). EU member states also would have to implement the rules on digital PEs and profit allocation (described below) for corporate income tax purposes.

Digital PEs

For a digital PE to exist, at least the following three conditions would need to be fulfilled:

  • The digital services offered in an EU member state generate revenue of at least EUR 7 million per year;
  • There is a minimum number of 100,000 active users of the digital services in a member state; and
  • A minimum number of 3,000 online business contracts have been entered into.


The concept of digital services is proposed to follow the description used for VAT purposes, based on the VAT-directive. “Anti fragmentation” rules would be introduced to prevent tax avoidance.

Profit allocation

The profit allocation rules relating to digital services would be aligned with the OECD transfer pricing guidelines. The basic assumption would be that profits should be taxed where value is created. In terms of digital services, the Commission specifically wishes to relate value creation to the location where the buyers of the digital services are established and data is collected and processed. To this end, additional criteria for profit allocation would be developed, specifically focusing on digital services, which could relate to:

  • Users’ engagement and contributions to a platform;
  • Data collected from users in an EU member state through a digital platform;
  • Number of users; and
  • Amount of user-generated content.


It is unclear when these structural changes would enter into effect. The European Commission would seek to have the changes incorporated into the OECD model tax treaty, through amendments to articles 5 (permanent establishment) and 7 (business profits).

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