The proposal for the EU Directive on the taxation of digital activities - will the 2019 year change the digital era?

The proposal for the EU Directive on the taxation of digital activities - will the 2019 year change the digital era?

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

Why do we care about DST?

The proposal for a European DST 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 DST, a tax of 3%, in each Member State from which that revenue was generated.

An example of a digital service mentioned in the proposal for a directive 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, 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 that the part corresponding to the other Member States would be transferred and transferred from here , as envisaged in the first proposal for the DST Directive. Or, the company should pay DST directly to each Member State in line with the latest proposals to amend the proposal for a directive.

This proposal for a directive, which is intended to be only a temporary measure on the taxation of revenues from the provision of digital services until a solid and long-lasting solution has been achieved and implemented, has emerged as a result of work at 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% tax applied to the income earned by these companies, each Member State, in proportion to the amount of revenue generated in each State.

A unitary approach among Member States? Not really!

The Member States' views on the usefulness of this temporary digital service tax measure are divided, without having succeeded, after several meetings, in forming a unitary approach, although the initial intentions were promising.

Austria, currently holding the presidency of the EU Council 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, again met at the ECOFIN meeting 4 December 2018, putting 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 adversary 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 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 implementing a temporary solution.

We can not 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, between the UK and EU DSTs, we see some differences, namely a 2% tax in the UK, compared with 3% at EU level and different income thresholds beyond which apply DST. However, the operating mechanism seems to be similar.

Do the rules change the game?

Irrespective of the final outcome of DST 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 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 the position of Romania?

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

However, a concrete or pro-DST position is still waiting. One thing is certain, Romania will have to analyze the impact of such a directive and decide, based on a thorough analysis, on which team it 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 that represents at present about 6% of Romania's gross domestic product, the implementation of such a directive is not one (only) theoretical.

Thus, the decisions (including DST) of the next period - when Romania will preside over the EU Council - will be extremely important for the country's economy and will be seriously impacted in the coming 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 DST Directive? It is hard to say at this time, given the shared views among Member States' representatives.

One thing is certain that 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.