Franco-German joint declaration on an EU digital services tax

A joint declaration by France and Germany suggests that the proposals for an EU DST, which failed to be agreed in the December 2018 ECOFIN meeting, may be restricted.

EU proposals for a digital services tax (DST) appear likely to be watered down following the ECOFIN meeting on 04 December 2018.

The Austrian Presidency of the EU Council had hoped to win support for the DST by putting forward a modified, compromise text for the meeting. This modified text included a number of significant changes to the proposal, including deferral of its implementation until 2022 and making the DST deductible against corporate profits. In addition, there was recognition that the 3% turnover tax would be dropped should the OECD reach a wider international agreement on the taxation of the digital economy targeted by these measures.

The press release issued by the Council makes it clear, however, that it was not possible to make progress on the DST proposal. Whilst it was debated, a number of jurisdictions rejected the proposal “for political reasons as a matter of principle”, whilst other jurisdictions were “not satisfied yet with some specific points in the text”.

Also put forward to the meeting was a joint Franco-German declaration on the taxation of digital companies. Whilst “reaffirming” the determination of France and Germany for a “fair and effective” tax on digital companies, the declaration also, in effect, accepts a more restricted basis for the EU proposals.

The declaration suggests that the EU Commission and the Council should focus the proposed EU Directive for a 3% DST on a “tax base referring to advertisement” only. Whilst pushing for a legally binding Directive on DST by March 2019, the declaration suggests that it should essentially be a backstop, only coming into force if no international solution based on the work of the OECD has been agreed upon by 01 January 2021. In addition, the Directive should only be temporary in any case, expiring by 2025. However, the declaration makes it clear that it would not prevent Member States adopting domestic DST provisions on a wider basis.

Assuming that the OECD does manage to reach international agreement on the taxation of digital businesses (which seems a rather large assumption at this stage), then the declaration expects the EU Commission to submit proposals on taxing the digital economy in line with those OECD agreed measures.

As a result, it appears that any further progress on the EU DST has been delayed until March 2019 at earliest. A further report from the OECD on international discussions is also expected in 2019. In the meantime, the UK continues to consult on the introduction of a DST as announced in the October 2019 Budget.

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