The European Union has been debating the proposal for the Digital Service Tax (DST). The proposal for the European DST Directive intends to establish a common system for the taxation of digital services, for revenues generated by the supply of these kinds of services. A company established in a Member State offering digital services in other Member States would have to pay a 3 percent digital service tax in each Member State where revenue is generated.
An example of a digital service mentioned in the directive proposal could be to provide users (individuals or businesses) with a multilateral digital interface allowing users to find other users and interact with them. Other examples are those about advertising or collecting data about users on digital interfaces.
However, as Alexander Milcev, partner, head of EY Romania’s Fiscal and Legal Aid Department notes, from an administrative point of view, it is not yet clear whether the declaration and payment of DSTs by a company would take place in a single Member State and whether the part corresponding to the other Member States would then be transferred, as envisaged in the first proposal for the DST Directive. Another version would be for the company to pay DST directly to each Member State in line with the latest amendments to the directive proposal.
”This directive proposal, which is intended to only be a temporary measure on the taxation of revenues from the provision of digital services until a solid and long-lasting solution is achieved and implemented, has emerged as a result of work at the EU and OECD level on ensuring fair rules on the taxation of the digital economy between countries and is geared towards companies offering digital services. Thus, the objective is to allocate the 3 percent tax applied to the income earned by these companies, each Member State, in proportion to the amount of revenue generated in each State,” says Milcev.
The Member States’ views on the usefulness of this temporary digital service tax measure are divided, without having succeeded in forming a unitary approach after several meetings, even though the initial intentions were promising.
Austria, currently holding the presidency of the Council of the EU and one of the core players of the “pro-DST” team, has expressed its continued support for the implementation of a temporary digital services tax system by the end of 2018.
France and Germany, also DST supporters, met at the ECOFIN meeting on 4 December 2018, and had a debate on a joint statement including a firm recommendation to the Council to adopt the DST Directive by March 2019 and its entry into force from 1 January 2021 to the extent that a permanent international solution is not approved until then.
In the opposite camp, the most determined players seem to be the Nordic countries, arguing that DST can generate much higher administration costs than the revenue that can be gained from collecting this fee, and that is why such a measure should be thought through carefully.
Other Member States, which appear to disagree with the DST, have had less tentative responses, noting that work to identify a permanent solution to digital transactions should continue without the implementation of a temporary solution.
”We cannot fail to notice the position of Britain scheduled to become an official EU outsider from the end of March 2019, which will implement a DST from April 2020, similar to the one proposed at EU level. However, we see some differences between the UK and EU’s DSTs, namely a 2 percent tax in the UK, compared with 3 percent at the EU level, as well as different income thresholds beyond which DST would be applied. However, the operating mechanism seems to be similar,” says Milcev.
Are the rules of the game going to change?
Regardless of the final outcome of the DST directive, one of the important tax initiatives mentioned by Jean-Claude Juncker, the President of the European Commission, is to change the voting pattern by moving away from the unanimous voting model currently applicable to the majority.
This change could significantly change the rules of the game, to the detriment of those in the minority, whose word may be less and less valuable in the context of important decisions.
What is Romania’s position?
Finance minister Eugen Teodorovici stated that Romania supports the EU’s efforts and advocates finding a common and equitable long-term solution for all Member States.
”However, a concrete or pro-DST position is still pending. One thing is certain – Romania will have to analyze the impact of such a directive and decide, based on a thorough analysis, which team it is going to choose. Sooner or later, such a directive will have to be adopted in the Romanian tax legislation,” says Milcev.
Given that the IT sector is a dynamic sector that currently represents about 6 percent of Romania’s gross domestic product, the implementation of such a directive is not (only) theoretical. Thus, the decisions (including DST) that will be taken in the next period – when Romania will preside over the EU Council – will be extremely important for the country’s economy and will have a serious impact in the coming years (when estimates show that the IT sector will rise to a level of about 11-12 percent of gross domestic product, according to EY calculations).
What can we expect next?
”The main question would be: will the Member States reach an understanding on the content of the DST Directive? It is hard to say at this time, given the split views among Member States’ representatives,” says Milcev.
”One thing is certain: the DST directive debates and work will continue at the beginning of next year. According to Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, at the ECOFIN meeting of 4 December 2018, the deadline for completing a unitary approach to digital service tax is set for March 2019.”