As part of the objective to improve fairness and efficiency of the EU tax systems, challenges of taxing the digitalisation has been discussed both in the European and in international forum.

In the European Union, the European Parliament resolution of 16 December 2015 called for legislative proposals adjusting the definition of 'permanent establishment' to grasp the digital presence and introducing a definition of 'minimum economic substance'.

The 21 March 2018 digital taxation package (see specific carriage) provides answers to the challenges identified in the accompanying communication 'Time to establish a modern, fair and efficient taxation standard for the digital economy', which are outdated corporate tax rules, and the need for an international solution. One of the two proposals part of the package is the proposal for a Council directive on the common system of a digital services tax on revenues resulting from the provision of certain digital adopted by the European Commission on 21 March 2018. The proposal aims at taxing revenues created by certain digital activities that remain untaxed. Revenues falling within the scope of the proposal are revenues created from selling online advertising space, from digital intermediary activities between users for facilitating the sale of goods and services and from the sale of data generated from the user-provider information. It applies only to companies with total worldwide revenues above 750 million euro and EU revenues of 50 million euro. 

The proposal is constructed as an interim measure until the comprehensive reform has been implemented.

In the European Parliament, ECON Committee voted on the draft report on the 3 December 2018 and the plenary vote took place on the 13 December. The Parliament proposes to lower the threshold above which companies would need to pay the tax from €50 million to €40 million. It also proposes to broaden the tax base by including 'content on a digital interface such as video, audio, games, or text using a digital interface', and the processing and sale of data collected from users and generated from their activities on digital interfaces. The tax would apply to services consisting of the supply of digital content by an entity through a digital interface, regardless of whether the digital content is owned by that entity, or that entity has acquired the rights to distribute it. In principle, the tax should cover revenues generated from the supply of digital services where users and intangible assets contributed significantly to the process of value creation. Finally, the level of revenues generated by the tax should be evaluated by the Commission within two years of the entry into force of the directive. When a taxable person is liable for taxation in more than one Member State, the Commission would audit, every three years, the tax return filed with the Member State of identification. Furthermore, the Parliament requests the Commission to examine the possible establishment of a dispute-resolution mechanism for cases of disagreement on the allocation of taxable revenues among Member States. The total digital service tax paid per Member State by a taxable person should be part of the system of country-by-country reporting. The report also introduces a sunset clause specifying that the tax would expire: (i) with the adoption of a proposal for a significant digital presence, or (ii) with the introduction of both a common corporate tax base (CCTB) and a common consolidated corporate tax base (CCCTB), should they include the concept of the digital permanent establishment as requested by the European Parliament, or (iii) with the implementation of an international solution reached in a forum such as the OECD or the United Nations. In case no comprehensive solution were to be agreed by 31 December 2020, the Parliament asks the Commission to consider presenting a proposal based on Article 116 TFEU, which provides for the ordinary legislative procedure to be used. Two years after the date of entry into force of the directive, the Commission should assess its application and present a report to the European Parliament and the Council. The Commission should then focus on the possibility of increasing the tax rate from 3% to 5%, on the scope and the amount of tax collected, and on the methods used by companies to avoid the tax. Member States would report relevant figures to the Commission annually, as well as inform it on the payment of the tax, and on their cooperation with other national tax authorities.

The proposal requires unanimity in the Council for its adoption, following consultation of the European Parliament (special legislative procedure). In the Council, the technical examination of the proposal takes place in the 'Working party on tax questions (direct taxation)'. The Austrian Presidency finalised technical work on the file and the ministers discussed the file in December 2018. They exchanged views on the Presidency compromise text and examined a joint declaration by the French and German delegation which proposes to limit the tax base to revenues from sales of advertisements. It was agreed that discussions would continue at technical level where it will be explored whether a narrower scope could be accepted by delegations.

On 12 March 2019, the Economic and Financial Affairs Council could not reach an agreement on the sales tax with a scope limited to digital advertising services. In parallel, the Presidency will work on the EU position in international discussions on digital tax, in particular in view of OECD's report on the issue, due by mid-2020. A mission letter for the Executive Vice-President for a Europe fit for Digital Age of the new Commission describes the mandate in this field. The Commissioner is tasked with helping to achieve the international solution, or if no consensus is found by the end of 2020, proposing a fair European tax. 

References:

• EP Legislative Observatory, Procedure file on the proposal for a directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services, 2018/0073(CNS)
• European Commission, Fair taxation of the digital economy, website

 For further reading:

• European Parliament, DG IPOL, Tax Challenges in the Digital Economy - Study for the TAXE II committee, April 2016
• European Parliament, EPRS,Interim digital services tax on revenues from certain digital services, Briefing, December 2018

Author: Pieter Baert, Members' Research Service, legislative-train@europarl.europa.eu