Digitalisation is here
An indirect Tax perspective
Digitalisation is disrupting the conventional methods in which business used to be conducted, hence presenting new scenarios on various indirect tax fronts mainly VAT and equally/more important a new concept of Digital Turnover Tax
As part of the Digital Single Market strategy a legislative proposal was made to modernise and simplify VAT for cross-border e-commerce which was adopted by ECOFIN on 5 December 2017 in the form of:
- Council Directive (EU) 2017/2455 of 5 December 2017 amending Directive 2006/112/EC and Directive 2009/132/EC as regards certain value added tax obligations for supplies of services and distance sales of goods
- Council Implementing Regulation (EU) 2017/2459 of 5 December 2017 amending Implementing Regulation (EU) No 282/2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax
The new rules will come into force in two stages. First (2019), a much-requested threshold will be introduced for the application of the existing MOSS (Mini One Stop Shop) system for TBEs (Telecommunications, broadcasting and electronic services), as well as a simplification regarding the evidence businesses need for determining the location of their customers.
Two years later (2021), the (M)OSS system for VAT reporting and payment will be extended to all types of services (B2C) as well as to distance sales of goods. The current import VAT exemption for low value consignments will be removed (current Article 23 of Council Directive 2009/132/EC). New rules will be introduced with regards to the VAT implications of electronically facilitating certain types of distance sales and the payment of import VAT.
The EU is also looking at the concept of a Single VAT Area encompassing:
- the introduction of a definitive system for taxation between Member states (shift from origin to destination principle)
- proposals with regards to certain exemptions for Intra Community Transactions
- the introduction of the concept of Certified Taxable Person
Moreover, earlier this year the EU submitted additional proposals with respect to more VAT Rates flexibility and less red tape for small businesses
At a domestic level, online VAT services are continuously being expanded to cover a wider array of services. From a technical perspective, the authorities are updating various guidelines with respect to certain areas which are experiencing continuous changes, whilst developing new guiding principles regarding new industries currently being developed in conjunction with all involved parties.
Taxation of Digitalised Activities
On 21 March 2018, the European Commission issued two proposals for new Directives regarding new ways to tax digitalized forms of business activity.
The proposals focus on a two-phased approach:
- an interim solution – Digital Services Tax (DST – 3% turnover tax across all EU Member States – will apply only until the SDP solution has been implemented.)
- a long-term solution – New Corporate taxation rules of a Significant Digital presence (SDP – new concept/definition of digital PE (Permanent Establishment) and revised profit attribution rules).
Digital Service Tax
It will tax revenues created from activities where users play a major role in value creation (difficult to capture with current tax rules) including:
- Selling online advertising space
- Digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them
- The sale of data generated from user-provided information SDP
For DST to apply the company must have total annual worldwide revenues of €750 million (or more) AND annual EU revenues of €50 million (or more). This will help to ensure that smaller start-ups and scale-up businesses remain unburdened. An estimated €5 billion in revenues a year could be generated for Member States if the tax is applied at a rate of 3%.
It will be based on a system of self-declaration by taxpayers. A One-Stop-Shop digital portal will be set up to help companies comply allowing a member state to identify the taxpayer, collect the tax and allocating it to other member states as appropriate.
Significant Digital Presence
It defines Digital services as services which are delivered over the internet or an electronic network and the nature of which renders their supply essentially automated, involving minimal human intervention. They are also impossible to ensure in the absence of information technology and identifies two lists of specific services which are covered (or not) by the said definition.
A company will be considered to have an SDP if one of the following three criteria is met:
- It exceeds €7 million in annual revenues from digital services in a member state
- It has more than 100,000 users who access its digital services in a member state in a taxable year
- Over 3000 business contracts for digital services are created between the company and business users in a taxable year
With respect to profit attribution the view is that the Authorized OECD approach (AOA), remains the underlying principle for attributing profits to a significant digital presence. However, it needs to be adapted in a consistent manner, to reflect the way value is created in digital activities.
The proposed rules lay down the general principles for allocating profits to a significant digital presence building on the current corporate tax rules which look at the risks managed, the functions performed, and the assets used by a permanent establishment and the criteria for allocating profits.
It also includes additional tests in the profit allocation process to reflect the fact that a significant part of a digital business’ value, is created where users are based and data is collected.
The proposal does not contain information regarding tax rates applicable under the SDP, with the indications being that member states would apply their national corporate income tax rules with respect to the profits attributable to a digital PE in their jurisdiction.
Both DST and SDP proposals will require unanimity in order to be implemented via new Directives with the Commission, hoping for final adoption by 31 December 2019, and transposition into national law on 1 January 2020.
All this is shaping up in a very dynamic indirect tax environment, wherein some major changes might be in store in the near future for operators acting in the digital business sphere. Such a sector is fast developing into one of the main pillars of the local economy. Hence the importance that both operators and authorities are continuously up to speed with respect to such changes and their wide-ranging implications, with a view to be well prepared, take timely and appropriate decisions, and collaborate together in the interest of all involved parties.