Page 62 - SAMENA Trends - January 2020

ARTICLE SAMENA TRENDS

Info Box 3: Digital Services Tax
France: On 11 July 2019, the French Senate adopted a law creating a “Tax on certain services provided by large companies in the
digital sector”, also termed the “GAFA tax” or “Digital Services Tax (“DST”), which was signed by President Macron on 24 July
2019. The DST at a rate of 3% is imposed on the gross revenues that companies derive from digital activities of which French
“users” are deemed to play a major role in value creation. It applies retroactively from 1 January 2019 and should be temporary,
while waiting for a long-term and coordinated solution by OECD members. According to the French government, there has
been a mismatch between the location (and manner) of taxing profits resulting from certain digital activities and when and how
the corresponding value is effectively generated. The DST is levied on two types of digital services, to which a specific set of
rules applies. These services include (1) the provision of a digital interface enabling users to enter into contacts and to interact
with others (“intermediary services”) and (2) the provision of services to advertisers that aim at placing targeted advertising
messages on a digital interface based on data collected about users and generated upon the consultation of such interface.

The DST sets out in detail which and how entities are affected by the tax and their obligations under the tax. Firstly, as regards
applicability, the DST sets out two key thresholds, both of which must be met by French and foreign businesses for the tax to
apply: €750 million annual worldwide turnover for digital services, and €25 million domestic turnover on digital services localized
in France. Secondly, services must be supplied in France, determined by the user’s IP address. As concerns the taxable basis, it
applies on the percentage representing the portion of taxable services related to France after application of the “French digital
presence” ratios to the corresponding worldwide receipts. As regards the process of payment, for any given calendar year, the
digital service tax is due in April of the following year. For 2019, there are transitional rules that detail only one instalment due in
November 2019, based on 100% of sums received from in-scope activities in 2018.

Overall, the DST will affect an estimated 30 multinationals, of which 17 alone are located in the US. Companies established
outside the EU (or certain EEA Member States) must appoint a tax representative. In terms of the compliance burden on impacted
business, the administrative reporting and compliance framework of the DST tax is aligned with the existing VAT framework.
Furthermore, there is an obligation for DST taxpayers to keep all relevant data collected and details of computation for a period of
6 years to enable the taxpayer to satisfy its obligation to provide these records to the tax authorities upon request. Administrative
guidelines were released in November 2019, outlining the details of this new tax. In terms of backlash, French tax professionals
have expressed concerns about the digital services tax in respect of its conformity to the French constitution, to EU law, and with
regard to provisions under applicable income tax treaties. Some believe that there will be taxpayers that decide to challenge the
tax after they pay the first instalment. Recently, US President Trump had indicated that there would be retaliatory action on a
number of luxury imports if the French DST were implemented. On the sidelines of the WEF’s Annual Meeting 2020, France and
the US agreed to put the Digital Tax on hold until the end of 2020.

International activities: To address the high-level tax challenges relating to the international tax framework, the OECD has been
working to drive the development of an international solution to digital economy taxation issues, with the focus on “nexus”
(namely, addressing the disconnect between tax jurisdiction and the location of value creation by expanding the definition of PE
to encompass “digital presence” as determined by the location of a service’s users), and reallocating profits (namely, reallocating
taxing rights among the “countries of residence”, the tax havens, and the “countries of consumption” by modifying the formulas
for allocating taxable income with the users’ contribution in mind (boosting the share taxable by the countries of consumption)).

The EU’s efforts to reach an EU-wide consensus on a Digital Services Tax are on hold. In the meantime, a number of countries
do not want to wait, pending globally or regionally agreed solutions, and are considering or moving forward with short-term gap-
stop measures, including the UK, Australia, Italy, Slowakia, India, Poland, Hungary, the Czech Republic, Austria, Spain, Belgium,
Slovenia and many others. While the UK government remains committed to reform of the international corporate tax framework
for digital businesses, pending global reform, it is undertaking interim action, to ensure that digital businesses pay tax that
reflects the value they derive from UK users. The UK government has therefore announced that it will introduce a Digital Services
Tax (DST) from April 2020 of 2% on the revenues of search engines, social media platforms and online marketplaces which derive
value from UK users, and which is estimated to raise £1.5 billion over four years. Other examples of unilateral action include
Italy, which established a 3% web tax on digital transactions, effective January 1, 2020 ; Slovakia, which revised the tax legislation
to oblige foreign digital platforms that provide transport and accommodation services such as AirBnB, Uber and Booking.com
to register and create permanent establishments and pay 21 percent corporate tax ; Hungary, which proposed an internet tax
in October 2017 and has implemented a 7.5% tax on digital advertising revenue of media content providers with a global tax
revenue of €305,326; and India, which introduced an equalization levy of 6% on online advertising revenue in 2016 and a revised
permanent establishment concept (“Significant Economic Presence” or SEP) in 2018.
(For further information see: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/
FlagPost/2019/August/Digital_Services_Taxation )

62 JANUARY 2020