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EU attempts to advance €5bn digital sales tax proposal

  • EU VAT
  • 18 July 2018 | Richard Asquith

EU attempts to advance €5bn digital sales tax proposal

EU member states will today discuss fresh attempts to agree on a temporary 3% digital sales tax (‘DST’) on large digital companies. DST has been backed by France, Spain and Italy. However, it has been subject to wavering support from Germany.

This week’s talks, led by the new Austrian presidency of the Council of the European Union, is seeking to overcome vetoes from digital-hub states including Ireland. Their concerns include: breach of global tax rules; broad definition of the scope of the tax on advertising revenues; and conflicts with ongoing global discussions on the future of digital corporate income tax by 113 countries at the OECD.

DST will be charged on income from: online advertising: digital subscription fees: and the sale of users’ activity data. The tax is seeking to raise up to €5billion for member states. It will target less than 150 US and EU businesses with a global turnover above €750bn, of which more than €50bn is generated within the EU.

The current global tax regime largely belongs in the pre-digital 20thCentury, and enables digital service providers to lower their tax rates by exploiting gaps between countries. However, the EU’s push for a turnover tax will struggle to gain support from smaller EU states like Ireland, the Netherlands, Malta and Sweden, which have attracted the US headquarters of digital giants on the basis of the current regime. It could also result in a US referral to the WTO on the grounds that the qualification criteria unfairly target US multinationals.

DST on businesses with EU ‘digital presence’ to counter lost tax base

The EU, and many countries around the world, maintains that today's international corporate tax rules are not fit for the realities of the modern global economy. They do not capture business models that can generates profits from digital services in a country without being physically present and therefore liable to corporate income tax.

The 3% DST interim tax ensures that those activities which are currently not effectively taxed would begin to generate immediate revenues for Member States. It would also help to avoid unilateral measures to tax digital activities in certain Member States which could lead to a patchwork of national responses which would be damaging for our Single Market.

Revenues subject to the tax will include:

  • Selling online advertising space
  • Created from digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them
  • Created from the sale of data generated from user-provided information.

In the long-term, tax will be levied on companies with a ‘digital presence’ A company from anywhere in the world will be deemed to have a taxable 'digital presence' or a virtual permanent establishment in a EU Member State if it fulfils one of the following criteria:

  • Over €7 million in annual revenues in a Member State
  • Have more than 100,000 users in a Member State in a taxable year
  • Over 3000 business contracts for digital services are created between the company and business users in a taxable year.
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VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which this year won International Tax Review's Tax Technology Firm of the Year. Richard qualified as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.