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Taxation of the Digital Economy: Status of the Quick Fix

6 December 2018

As we reported in a "digital economy" update earlier this year, digital taxation has been raising many debates at both the OECD and the EU levels.

Since that update, the short-term EU measure, known as the "digital services tax" ("DST"), has been amended and reviewed by the member states' delegations and was discussed in the 3659th ECOFIN meeting on December 4, 2018.

It now appears that the DST, intended as a short-term and quick-to-implement measure, may take more time than anticipated to (ever) see the light of day.

Compromise text on the DST

Many member states called the initial (draft) DST proposal, which was issued on March 21, 2018, a potential threat to international trade and a possible source of technical issues.

Although most of the EU member states agreed that the international tax framework needed revision to ensure that digital business models would be properly captured, the majority preferred a global and coordinated approach at the OECD level.

The member states, therefore, did not reach consensus on the first version of the draft.

Following up on the various technical debates held on the matter, the EU Council's presidency published a compromise text containing the elements believed to have the member states’ support.

The presidency says that all technical issues have been examined and—despite the remaining reservations of a number of delegations—the technical work on the DST has reached a point where it is time for the ministers to take a stance on it to ensure fair taxation of the digital economy in the short-term.

December 4, 2018 ECOFIN outcome

The compromise text, which basically maintains the initial design of the DST, did not receive positive feedback at the December 4 ECOFIN meeting.

Given the lack of consensus, France, the DST’s biggest supporter, allied with Germany, which was backpedaling on the initiative due to potential backlash to its automobile industry, to issue a "joint declaration on the taxation of digital companies and minimum taxation."

In the joint declaration, France and Germany are pushing for an in-depth revision of the DST that would limit the scope of the 3% tax to Internet advertisement revenues.

Nevertheless, France and Germany invite the EU Commission and the Council to submit proposals on taxing the digital economy in line with the work at the OECD level. They also urge the Council to adopt the DST directive without delay and, in any case, before March 2019, for an entry into force on January 1, 2021 if no international solution has been agreed on by then. The directive would be a minimum standard that would not prevent member states to implement it with a broader base.

What's next?

Pursuant to the above, the EU Commission has been asked to work on new proposals and feedback should be provided to the ECOFIN in early 2019.

Even with Germany now backing the (limited) DST, it remains to be seen whether an agreement could be reached on this reduced-scope proposal.

Opting for a directive laying down minimum standards of taxation could, however, raise technical issues from a tax, international trade and EU law perspective.