On 4 December 2018, ministers of EU member states gathered in the respective groups of the European Council, to discuss two proposals on a Digital Service Tax and on the e-Privacy regulation. On both issues, EU countries are still clearly divided, and are failing to make significant progress. The Romanian presidency will now try to reach a compromise on these two legislative positions, although it is increasingly likely that neither of them will be finalised before the next European elections of May 2019.
France and Germany tabled a new proposal for a Digital Tax in an effort to rescue the initiative
Since its inception, the EC’s proposal for a Digital Services Tax (DST) turned out to be a controversial matter across EU countries. Member states with different interests, and widely varying tax rates, unsurprisingly disagreed on the proposal to tax the EU revenues of digital giants. Countries with lower tax rates have been particularly opposed to the initiative, which aimed to tax businesses with either a €7m turnover, or 100k users, or 3,000 business contracts per year in an EU country. The plan also included an interim tax to be applied until the main measure is finalised.
The ECOFIN meeting of 4 December 2018 saw a new proposal tabled by France and Germany as a radical amendment to the main one. It is, in essence, an interim tax to be enforced while the work carried out by the OECD on digital taxation is completed. It would only cover ‘targeted advertising’ revenues, platforms (defined as “multi-sided digital interfaces”), and sale of data generated by users’ activities (i.e. users’ behavioural data). The tax would be at a rate of 3%, and apply to firms whose annual worldwide turnover is more than €750m, and whose total taxable revenues within the EU exceeds €50m. Parts of the recital leave member states room to introduce further taxes, providing they are also charged on non-digital firms; and to deduct the DST from the corporate income tax base in their territory.
Member states have promised constructive engagement on the new proposal, although skepticism remains
ECOFIN ministers have debated the new Franco-German proposal for the first time on 4 December 2018. This means they will need time to work on the details – but what many of them said already signals that the proposal will not have a much easier life than the previous one. Countries which were opposed to the initial version of the DST have, in general, not warmed to the new draft; and countries which were supportive of the EC’s initiative are now lamenting a lack of ambition. Commissioner Pierre Moscovici, in charge for the matter on the EC’s side, was clearly disappointed by the failure to reach a position on his draft, but accepted the reality of having to settle for a less far-reaching text.
Having submitted the new proposal, Germany and France were obviously talking up the new text. In particular, the French minister stressed the need for a digital tax to address competition problems and help small startups – a position echoed by his Belgian colleague. Many countries repeated that the OECD is the best forum to address the issue, thereby signalling the intention to delay the proposal as much as possible despite the apparent pledge to engage constructively in the negotiations. This was the position of Sweden, Czech Republic, Latvia, Finland, Lithuania, Ireland. In particular, Lithuania signalled that the sunset clause should be set with the earliest possible date.
Among the countries most keen to go ahead with a European DST, Italy and Spain voiced their disappointment: the former reluctantly accepted that the Franco-German solution is now the only possible way forward, whereas the latter noted it might not fulfil the objective of a fair and efficient system, and there might be little point in levying a tax whose benefits are likely to be largely offset by its implementation costs. In short, it will take a lot of goodwill and persuasion for the Romanian presidency of the Council, starting in January 2019, if a compromise is to be reached by March (ministers agreed to aim for March during the meeting, and European elections are due to take place in May).
Progress is too slow on the e-Privacy regulation, much to the frustration of the Commission
While ECOFIN ministers were debating the DST proposal, the Transport, Telecommunications and Energy Council (TTE) took stock of the progress on the e-Privacy regulation, which is set to replace the e-Privacy Directive of 2002. The Directive applies to telcos only, and establishes the confidentiality of communications. It also carries strict limitations for the use of communication metadata (e.g. location etc.), which can currently be used only for specific value-added services, with explicit consent of the customer.
The Regulation was proposed by the EC in January 2017. The Parliament finalised its position in October 2017, introducing stronger privacy safeguards in areas such as the protection of information stored in users’ terminal equipment; it also specifies that communications data of a person should be protected in cloud and IoT environments. Before the trilogue negotiations can begin, the Council should now adopt its own text. However, member states are yet to reach a common position.
Ministers approved a progress report on e-Privacy, but also showed how much is left to resolve
Member states have been divided all along on e-Privacy. The most immediately recognisable divide is a long the lines of consumer protection (Germany, Spain, Netherlands, Greece, among others) versus investment/innovation, since digital industries are keen to have flexibility in the use of communications metadata. This alone is sufficient to understand the tension, and consequent delay, in the negotiations; however, there is more at play.
In the meeting of 4 December 2018, the TTE Council approved a progress report, but also showed there is still plenty to iron out. Several countries highlighted the need to have a text in line with the GDPR, to ensure consistency in how personal data is treated. But others (e.g. Bulgaria) argue that there should be no duplication between the GDPR and this directive. More generally, several countries pointed at the large number of technical and legal issues still unresolved (Czech Republic, Slovakia, UK). Italy’s concerns relate to the lack of future-proof arrangements on aspects such as AI, and also highlighted the need for further attention to data retention and authorities’ access to communications data. Croatia notes that one key issue is that of competent national authorities to enforce the directive. Germany, together with some other countries, noted that some provisions could hinder efforts to fight child abuse online – a stance which EU Commissioner Andrus Ansip refused to accept.
The discussion ended with Ansip’s disappointment, and frustration, for not being able to make significant progress toward a final text – “We will create a big mess if we do not find an agreement”. He later issued a full statement exposing his concern and the need to move forward rapidly. The Romanian presidency, early in 2019, will now have to try and square the circle.
