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The Digital Tax Binary Dominates

Kitty Miv, Editor
30 January, 2020

While it's still too early to call how things are going to pan out tax-wise in 2020 (it is only the 83rd of January, after all...), in a period in which you might expect Brexit to be dominating the news cycle, it really isn't, with digital taxes drawing focus in a week in which reports stated that France will suspend digital tax payments for 2020 to prevent the imposition of tariffs on certain French imports into the United States.

The French DST is a three percent tax on the revenue of digital companies providing advertising services, selling user data for advertising purposes, or performing intermediation services. Companies with global revenues of EUR750m (USD838m) or more and French sales of at least EUR25m are required to pay the tax.

The US argues that the tax unfairly discriminates against American companies and is currently considering proposals to impose retaliatory tariffs of up to 100 percent on around USD2.4bn worth of French products.

However, according to various media reports, following discussions between French Finance Minister Bruno Le Maire and US Treasury Secretary Steven Mnuchin against the backdrop of the World Economic Forum in Switzerland, France has agreed not to collect digital tax payments this year. In return the US will suspend its threat to impose the additional tariffs, with the two countries now set to hold talks on a more definitive agreement.

French President Emanuel Macron also tweeted that France and the US "will work together on a good agreement to avoid tariff escalation," following a "great discussion" with President Donald Trump at the World Economic Forum in Davos, Switzerland, on January 20, 2020.

Nevertheless, as talks on the taxation of the digital economy continue at OECD level, it appears that the US remains at odds with other leading economies about the most appropriate solution, and with regard to the situation between France and the United States, Le Maire has stressed that France will not repeal the digital tax, which he reiterated will remain in place until France is able to implement internationally-agreed digital tax measures.

In the UK, meanwhile, The UK Chancellor, Sajid Javid, has said the UK intends to push ahead with the introduction of a digital services tax from April 2020, despite warnings from the US that it would consider tariffs on UK-made goods.

The UK Government has proposed that its DST will apply to revenue generated by search engines, social media platforms, and online marketplaces, to revenues from those activities that are linked to the participation of UK users. It will apply only to groups that generate global revenues from in-scope business activities in excess of GBP500m (USD659m) per year. Businesses will not have to pay tax on their first GBP25m of UK taxable revenues.

The regime will include a safe harbor provision that will exempt loss-making businesses as well as provisions that will reduce the effective rate of tax on businesses with very low profit margins. It is proposed that the tax will be deductible against UK corporation tax under existing principles, but it will not be creditable.

Meanwhile, in the European arena, EU finance ministers have exchanged views on how to respond to the tax challenges arising from digitalization.

At a meeting of the Economic and Financial Affairs Council (ECOFIN) on January 21, ministers took stock of the progress achieved in this area, as part of the follow-up work under the OECD's BEPS project. They covered Pillar One of the project, which considers the reallocation of profits of digitalized businesses, and Pillar Two, which focuses on reform of international corporate taxation rules.

According to a statement from ECOFIN, the debate among ministers confirmed that an international solution on digital taxation is the best way forward. It is hoped that an international agreement would prevent fragmentation and unilateral measures.

Ministers are said to have acknowledged that the OECD is working against a tight deadline as it attempts to reach a global consensus by the end of the year.

Not particularly surprisingly, given its role as a technology hub within the EU, Ireland's governing party Fine Gael looks set to buck the trend if successful in the forthcoming election, pledging (among other promises made in its election manifesto, which includes proposals to reduce the income tax burden and reform the taxation of SMEs) that although the party "recognizes that taxation policy needs to catch up with a changing digital economy," it feels that this work "is best done through the OECD" and that it "will not support unilateral measures that could risk trade and undermine the competitiveness of exporting EU member states."

Last but not least for this week's column, we return to the United States' somewhat spiky relations with other countries in the realm of digital taxes, and it has emerged that the US authorities have threatened to impose tariffs on goods imported from the Czech Republic in response to that country's decision to introduce a tax on digital services – a definite theme developing here!

According to various media reports, the US embassy in Prague issued a statement on January 24, 2020, which reiterated the US Government's hostility to national digital services taxes, arguing that the Trump administration has been "clear" on the issue.

The US embassy's statement also comes after the US ambassador to the Czech Republic, Stephen King, wrote an opinion piece in December 2019 in which he mentioned that "some form of counter-measure" could be imposed in response to the introduction of the Czech DST.

As approved by the Czech Government on November 18, 2019, the seven percent DST would apply to revenues from online advertising, the sale of user data, and intermediation services, by companies with a global turnover of EUR750m (USD827m) or more and realizing sales in the Czech Republic of at least CZK100m. Companies will be liable for the tax if they receive at least CZK5m from online advertising and selling user data in the Czech Republic. Similarly, the DST will only apply to revenue from intermediation services if the platform has in excess of 200,000 users.

However, if less than 10 percent of a company's total taxable sales are realized within Europe, it will be excluded from the scope of the DST.

As written, the draft law would be temporary, expiring at the end of the 2024 tax year.

However, in line with its Irish counterpart, the Czech Government has underscored that it would prefer to sign up to an internationally agreed solution to the tax challenges of the digitalized economy.

Until next week!

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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