Since the end of 2018, several governments around the world have put forward proposals for the introduction of a digital service tax in their respective countries. As digital services change the nature of business, governments see the tax as a way to overcome the challenges that these digital businesses create for the international corporate tax system. Assembly’s Platforms and Big Tech Tracker has identified nine countries where this has happened; most of them in the EU, where the failure to reach a common approach at a supranational level has led many of them to go their own way. Countries in Asia and America are also taking action, while the international initiative, within the OECD, continues to lag behind and may be preempted by the proliferation of national regulations. While international coordination would be desirable, the trend of countries taking individual action is likely to continue given the slow pace at which supranational bodies are progressing; this will result in an inconsistent patchwork of tax regimes and rates around the world, and even within the EU.
So far nine countries have started work to introduce a digital tax
Proposals to introduce a tax on digital services are becoming increasingly widespread. As commercial activities increasingly take place online across borders, governments are intensifying their efforts to capture this change and ensure it does not translate into a loss of tax revenue for their countries. Much like data protection regulations, this is an area that could benefit from coordinated regulatory action at the international level; nonetheless, efforts to achieve a consistent approach in the EU have failed, and the OECD initiative to foster harmonisation is still far from a done deal, despite recent progress. As a result, some countries have decided to go their own way. Assembly’s Platforms and Big Tech Tracker captures recent proposals in nine countries (Austria, Belgium, Czech Republic, France, Italy, Mexico, Singapore, Spain, UK) and finds that approaches differ significantly in many respects.
The risk of regulatory competition between countries, where a more permissive framework could end up being more attractive than a prescriptive one for digital firms, is seemingly not discouraging some countries from taking initiative. There are two main reasons for this: one is the need for treasuries to capture the revenue generated by digital activity in an increasingly digital world; another is that companies do not need to have an establishment in a given country to be subject to a tax like the one proposed in most of the countries where this is happening. This means governments are playing down risks that taxing digital activities could end up discouraging them, or making them more expensive for the end user; and that the trend of the recent months, which has mainly seen EU countries taking action, is likely to continue and could spread elsewhere.
The EC’s proposal has informed some national initiatives
The European Commission’s initiative to introduce a digital services tax was short-lived. It faced obstacles from the outset, as EU member states appeared divided on the EC’s proposal of March 2018, and the OECD also voiced its criticism toward the Commission’s approach. This in turn, strengthened the hand of the countries opposed to the measure, which could then advocate for an OECD-led effort. In December 2018, the European Council failed to reach an agreement; France and Germany then tried a watered-down proposal, with a view to close a deal by March 2019; however, this effort also failed, and the initiative was entirely abandoned.
Nonetheless, the EC’s effort has still partially achieved in giving countries a baseline to adopt a consistent approach, since many of the EU countries that decided to go their own way have kept at least one common denominator. This can be clearly seen in Austria, Belgium, Czech Republic, France, Italy, and Spain, where governments have all proposed a tax on firms meeting similar conditions in terms of worldwide turnover: all the proposals of the respective governments apply to firms with a worldwide annual turnover of €750m from the relevant digital activities. In Austria and France, companies making a turnover of €25m at the national level are also included, whereas in Italy the national minimum taxable revenue is €5.5m. In Spain, the threshold it is €3m combined with the minimum worldwide revenue. Another aspect in which EU states’ proposal are consistent relates to the exclusions from the scope of the tax: in line with the EU’s proposal, some categories of business are excluded (generally, e-commerce, financial services, and services provided between firms of the same group). Things change with regard to the tax rate each country foresees to impose: this will be 3% in Belgium, France, Italy and Spain, whereas Austria is looking at a 5% rate. The UK, which has been the first to present a national proposal, is doing things rather differently: the 2% tax would only apply to firms generating at least £500m worldwide in a year, thought the first £25m would not be taxable, so that small businesses are excluded from the scope. Czech Republic is also an outlier, with a 7% tax rate aimed only at targeted advertising.
OECD countries are still a long way away from reaching any sort of consensus
The recent flurry of national activity on the digital tax front does not mean that international initiatives are dead; however, with the demise of the EU proposal, the main international forum dealing with the issue is now the OECD, which is progressing at a much slower pace, and whose decisions result in non-binding policy recommendations. In January 2019, OECD members agreed to continue to work on a global, consensus-based solution, although this is unlikely to provide tangible results by the end of this year. The OECD is aiming to reach an agreement by the end of 2020. In the meantime, the OECD Secretary-General will update the G20 Finance Ministers at their meeting of June 2019 in Fukuoka, Japan.
The OECD’s Inclusive Framework has identified the pillars on which the digital taxation policy should sit. The key idea is to revisit the ‘nexus’ rules, i.e. how to determine the connection of a business with a given jurisdiction and how much profit should be allocated to the business conducted there. The framework will also consider concepts such as ‘marketing intangibles’, ‘user contribution’ and ‘significant economic presence’, and how they can be used to modernise the system. In March 2019, the OECD issued a new policy note on the topic, which highlighted how much divide is still present across jurisdictions on some key points that will need to be addressed. In particular, the note reminded that the OECD does not recommend the adoption of interim measures by individual jurisdiction, and that the proliferation of such measures would be undesirable. The activity of recent months at the national level shows that governments are not listening, and that the need to have some form of digital services tax in place as soon as possible is becoming more and more pressing.
