February 2019
On 18 January 2019, the Spanish Government approved the Bill for Digital Services Tax (Impuesto sobre determinados servicios Digitales). In order to adapt Spanish tax laws to new digital services business models, a tax reform is being implemented. Isabel Celaá, the Government spokesperson, stressed that this reform “is addressed to multinationals that operate in a privileged way, causing a great disadvantage to other companies that pay their corresponding taxes”.
The digital economy has changed the traditional way of understanding taxation. This has worsened the current problem between companies located in a country and other companies that make profits within that country without a physical presence. Traditional business models, based on presence in countries or face-to-face customer services, have evolved into digital business models, with minimum physical presence, where data and contributions made by users are key business assets.
The current debate is about the validity of the current tax regulation and the concept of permanent establishment, which relies on the idea of physical presence (the traditional “fixed place of business”), as opposed to those activities based on the use of customers’ data and the intermediation of digital platforms.
In order to reduce this loss in collected tax revenue, the OECD countries have reacted by promoting tools to try to solve these problems. The proposal is known as the Base Erosion and Profit Shifting (BEPS) Action Plan. Action 1 of the plan aims to identify and address the main challenges that the digital economy poses for the existing international tax regulations. However, in contrast to the initial proposal of the OECD members, the final report did include a specific solution.
With the aim of regulating the taxation of those operations carried out by companies with significant digital presence in Member States, the EU issued a Directive on taxation of digital economies, published in March 2018, whose ratification is expected by January 2020.
On 4 December 2018, ECOFIN, following the proposals of France and Germany, proposed a scope reduction to the regulation, limiting it to a single taxable event: online advertising. In addition, the duration of the regulation was set to be from 2021 until 2025.
Due to the urgency of this international matter, Spain released a draft bill introducing a Digital Services Tax, which was forwarded to the Parliament on 18 January 2019.
The Bill proposes a 3% tax on the provision of the following digital services:
Digital advertising targeting users of particular digital platforms (online advertising services);
Services consisting in making available multi-sided digital interfaces to users which allow users to find other users and to interact with them, and which may also facilitate the provision of underlying supplies of goods or services directly between users (online intermediation services);
Services whose purpose is to allow users to find and connect to other digital platforms where e-commerce purposes could also be promoted
The transmission of data collected about users which has been generated from such users’ activities on digital interfaces (data transfer services).
In principle, this Digital Service Tax is focused on the services rendered, regardless of the providers’ features. This tax should not be considered as an income or wealth tax and, therefore, should fall outside the scope of the tax treaties entered into by Spain.
Nevertheless, the following question arises: which mechanism will be implemented to avoid the double taxation that may occur when the services are taxed both in the source country and in the country of residence? At this time, there is no answer to this question and it will be necessary to follow the parliamentary procedure of the Bill to identify possible solutions to this problem.
Most of the highly digitalised groups that may be affected by the new Digital Service Tax have expressed their concern about the decision of Spanish Government to implement these measures without waiting for conclusions at the OECD or European level.
The lack of European coherence on the Digital Service Tax worries international and domestic companies. The former is concerned due to the potential reduction of investments in Spain, and the latter due to the potential loss of competitiveness of Spanish companies.
In addition, the estimations made by the Spanish tax authorities do not convince the market or the European Union. The new ECOFIN proposal also faces additional challenges, as a European agreement is unlikely and many countries oppose it. As a result, ECOFIN proposes reducing the scope of the services to be taxed, opting for a less ambitious tax law.
Despite the controversy over the Digital Services Tax and the ECOFIN proposal, the Spanish government has continued to seek parliamentary approval for the Digital Services Tax, maintaining its objective of taxing online advertising, online intermediation, and data transmission.
Anna Turu
anna.turu@bdo.es