The proposal for the EU Digital Taxation Directive - will 2019 be the year that will change the digital age?

The proposal for the EU Digital Taxation Directive - will 2019 be the year that will change the digital age?

At European level, we are witnessing a heated debate between Member States on the proposal of the Digital Services Tax (DST).

Why we are interested in DST?

The proposal for the European SDS Directive intends to establish a common system for the taxation of digital services, for revenues generated by the provision of certain services of this kind.

A company established in a Member State offering digital services in other Member States would have to pay SDR, a tax set at 3%, in each Member State from which that revenue was generated.

An example of a digital service mentioned in the proposed directive could be to provide users (individuals or businesses) with a multilateral digital interface that allows users to find other users and interact with them.
Other examples are ads or data collection about users on digital interfaces.

But from an administrative point of view, it is not yet clear whether the declaration and payment of SDRs by a company would take place in a single Member State and that the part corresponding to the other Member States would be transferred and transferred from here , as envisaged in the first proposal of the SDR Directive.

Or the company should pay SDR directly to each Member State, according to the latest proposals to amend the proposal for a directive.

This proposal for a directive, which is intended to be only a temporary measure of taxation of revenues from the provision of digital services, until a robust and long-lasting solution has been obtained and implemented, has emerged as a result of work at EU and OECD level on ensuring fair rules on digital economy taxation across countries, and is geared towards companies that offer digital services.

Thus, the objective is to allocate the 3% tax on the income earned by these companies, to each Member State, in proportion to the amount of revenue generated in each State.

A unitary approach among Member States? Not really!

Member States' views on the usefulness of this temporary digital services tax measure are shared, without having succeeded, after several meetings, to develop a unitary approach, although initial intentions were promising.

Austria, which currently holds the presidency of the EU Council and is one of the pro-DST's core players, has expressed its continued support for the implementation of a temporary digital services tax system by the end of 2018.

France and Germany, also SDS supporters, again met at the ECOFIN meeting on December 4, 2018, submitting a joint statement containing a firm recommendation to the Council to adopt the SDS directive by March 2019 and its entry into force starting on January 1st, 2021, to the extent that a permanent international solution is not agreed until then.

In the opposing camp, the most decided players appear to be the Nordic countries, claiming that DST can generate much higher management costs than the revenue that can be obtained from collecting this fee, and that's why such a measure should be carefully thought out.

Other Member States, which seem to disagree with the SDS, have had less transient responses, noting that work to identify a permanent digital transaction tax solution should continue without implementing a temporary solution.

We can not ignore the position of Britain, scheduled to become an official EU outsider from the end of March 2019, which will implement a SDR from April 2020, similar to the one proposed at EU level.

However, between the UK and EU SDRs, we see some differences, namely a 2% tax in the UK, compared with 3% at EU level and different income thresholds beyond which apply SDS. However, the operating mechanism seems to be similar.

Do the rules change the game?

Regardless of the final outcome of SDR adoption, 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 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 become less and less valuable in the context of important decisions.

What is the position of Romania?

Minister of Public Finance, Eugen Teodorovici, states that Romania supports efforts at EU level and advocates finding a common and equitable long-term solution for all member states.

However, a concrete or pro-SDT 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, on what the team is playing. Sooner or later, such a directive will have to be adopted in Romanian tax legislation.

Given that the IT sector is a dynamic sector currently accounting for about 6% of Romania's gross domestic product, the implementation of such a directive is not one (only) theoretical.

Thus, the decisions (including the SDR) of the next period - when Romania assures the presidency of the EU Council - will be extremely important for the country's economy and will seriously impinge on the next years (when estimates show that the IT sector will rise to a level of about 11-12% 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 of the content of the SDR Directive? It is difficult to say at this point, given the shared views among the Member States' representatives.

One thing is certain that the debates and work on the SDR Directive will continue early next year.

According to Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, at the ECOFIN meeting on 4 December 2018, the deadline for completing a unified approach to digital service tax is set for March 2019.