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Legal innovation in Industry 4.0




New taxation of the digital economy in the EU and Spain: the facts

Juan Camilo Sánchez, senior associate of Tax department.

The taxation of technology giants is in the spotlight. Both the European Commission and Spain, together with other EU member states, are considering introducing legal reforms to set out the path for taxation of digital business activities. The OECD has also published its findings on this issue, in a recent report examining the tax challenges of digitalization.

Here we explain the key facts about all these initiatives.

1.- What do the two European Commission proposals comprise?

On March 21 the European Commission presented two legislative proposals: one comprehensive, and the other, interim. The first initiative is targeted at reforming corporate income tax rules, by changing in particular the “permanent establishment” concept so that profits will be reported and taxed wherever businesses have significant interaction with users through digital channels. This is the Commission’s preferred long-term solution, though in the meanwhile, until that comes about, the second proposal responds to calls from several member states for an interim tax covering the main digital activities that are currently escaping tax in the EU.

2.- When will a company be deemed to have a digital presence?

According to the Commission’s proposed corporate income tax reform, a digital platform has a taxable digital presence or a virtual permanent establishment in a member state if it exceeds the threshold of €7 million, or it has more than 100,000 users in a member state in a taxable year, or over 3000 business contracts for digital services are created between the company and business users in a taxable year.

3.- What will be done in the meanwhile before this measure arrives?

The EU is proposing an interim tax to cover the period until the comprehensive reform has been implemented. The goal is for member states to start collecting revenues from digital activities immediately. It will be applicable to revenues obtained by the technology giants from activities in which users play a major role in value creation, such as those created from selling online advertising space, or from digital intermediary activities (which allow users to interact with other users and which can facilitate the sale of goods or services between them), or else from the sale of collected user data. For the time being a 3% tax rate has been proposed. The measure also contains mechanisms to mitigate double taxation.

4.- Who will collect this interim tax and how will it be applied?

The Commission’s proposal sets out that tax revenues will be collected by the member states where the user is located and will be applicable only to companies with total annual worldwide revenues of €750 million and EU revenues of €50 million.

5.- How much is the European Union expecting to collect?

The Commission estimates that member states could collect €5 billion in annual revenues if a 3% tax rate is applied.

6.- What timeframes are being considered?

The legislative proposals have been submitted for approval by the Council and for consultation to the European Parliament. Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, has expressed a desire to reach an agreement between the end of the year.

7.- How have the member states reacted to these proposals?

Opposition from ten European countries or thereabouts has stymied for the time being the chances of an agreement to introduce a tax on sales of the digital giants. The political negotiation began on April 27 at an informal meeting of finance ministers. The countries have started off divided, and the measure has to be approved by all twenty-eight of them. Ireland, Malta, Luxembourg, Sweden, Finland, Denmark, Lithuania and the UK are opposed to unilateral measures and call for an international solution, according to a number of sources. Taking the opposite view, France, Spain, Portugal, Poland, Slovakia, Bulgaria and Italy are in favor of the interim tax, whereas the other countries in the group of twenty-eight have stayed on the fence. There is still a way round this, however, in that by using mechanisms such as “enhanced cooperation” not requiring strict unanimous approval the measure could go ahead for only a few of the countries.

8.- What was found in the OECD report on the tax challenges arising from digitalization and what impact has it had on the European Commission’s announced measures?

The Commission’s proposals are the EU’s reaction to the interim report published by the OECD on March 16. That report contains a review from a broad perspective of the challenges of the digital economy and the options for confronting its taxation. It also points to the drawbacks of immediate measures (taxes on certain digital activities), and favors these measures reaching a limited number of businesses.

9.- And what about Spain? What does the measure proposed by the Spanish government comprise?

The Spanish government has announced a tax on the technology giants with which it plans to finance the increase in pensions, by implementing the interim tax proposed by the European Commission. Cristóbal Montoro, the Spanish finance and public authorities minister, made this announcement at a press conference following the cabinet meeting on April 27 and, a day later, Ramón Escolano, the economy minister, specified that the tax would arrive in 2019. Not many more details have been published since. The government will propose the measure to the Pacto de Toledo pensions commission for it to be implemented.

10.- How will this new tax sit with the interim tax proposed by the European Commission?

That is the big question. The European Commission’s proposal of an interim tax has yet to be approved, and is set to be debated over coming months, so any steps by Spain before then could result in a different set of rules, clashing even with those approved in other EU countries. This is perhaps why the government has announced that we will not see it until 2019.