On 21 March 2018, the EU Commission presented two Proposals for Council Directives specifically targeting the digital economy. One was about taxing corporations' significant digital presences, while the other introduced a new, common, interim system of tax on revenues that arise from the provision of certain digital services by tech companies of a certain size. This latter system is dubbed the digital services tax, or DST.

The DST is the EU's response to public demand for a harmonised approach to the long-standing matter of the taxation of the digital economy, and it comes at a time when EU countries are eager to take unilateral and uncoordinated measures.

It is supposed to be a temporary measure, lasting only until the EU and/or the international community can provide a solution for how to allocate profits in the digital economy. The original proposal lacked a sunset clause, but the most recent compromise text already provides for one: the Directive would expire upon the entry into force of an OECD-level solution or a set date (to be determined).

Since March, the DST has been the subject of much discussion and uncertainty. But one thing has remained clear: this matter is a very important one at the EU level and, although no consensus has yet been reached, the Directive will likely be approved next year and become effective from 1 January 2022.

However, will the DST really solve an existing problem, or will it merely create new ones?

The right aims, but questionable methods

The key issue driving this entire discussion is the taxation (or lack thereof) of profits. The DST's aim is to close the gap between the corporate taxation of digital firms and that of traditional ones, ensuring that taxation occurs where "value is created" which, according to the proposal, corresponds essentially to the location where the digital platform's users are.

The Commission is clear on the fact that the DST will coexist harmoniously with double tax treaties (DTTs), something that has been discussed widely with Member States. It's a key point because if the DST required DTT renegotiation with third countries, that would essentially negate its objective.

But, some critics have asked: what would stop the DST from being understood as an income tax? Indeed, it arguably doesn't differ hugely from taxes on gross service fees paid to foreign providers who have no permanent establishment in the country—in the sense that the tax follows the location of the user rather than of the company itself.

Others have pointed out that, if the DST is aimed at profits, why does it tax profits through revenues? Other methods, for example, could take into account whether entities are profitable, loss-making, or even non-profit.

To address double taxation, the Commission encourages Members States to deduct the DST against the relevant corporate tax base. This method (as opposed to a tax credit) would only partially address double taxation, and thus may not be a fully effective approach given that the States—whose big tech companies the DST is essentially targeting—probably wouldn't pass a similar measure.

The proposed DST begs other questions on the topic of value. The business models under scrutiny, i.e. those of tech-based companies, vary greatly—particularly regarding interaction with users. It is up for debate where the real value of, for instance, the advertisement business model derives from. Is it from the input generated by users, or from the capacity to process user data and to develop algorithms that can tailor ads to those users? And if we conclude that real value effectively derives from the users' interaction on the digital platform, would it follow that they deserve remuneration for that?

User value as a metric is also debatable in a post-GDPR context, where users can opt out of having their data shared for targeted advertisements. Advertisements are still shown, but with no relation with their interests. Some have argued that this would affect the perception of value. Their claim is that, with user value as a metric, defining how and where profit is distributed will be difficult.

And if it can be done—then monitoring it poses another hurdle. Member States, for example, would have to figure out whether companies outside the EU need to pay DST to them, which would rely on taxpayers self-declaring. This could be costly in terms of technology and in general, and DST critics have suggested that it's not worth it for a measure that is temporary.

What will the future bring?

Following the ECOFIN meeting on 4 December, the initiative seems to be losing some traction. France and Germany issued a joint declaration recommending a reduction in its scope, to only target advertisement (while allowing Member States the freedom to have broader scopes), and to push for entry into force on 1 January 2021 (instead of 2022). The presidency has now issued a "compromised text" that amends and excludes certain contentious points, in an effort to get more support.

The DST would generate tax revenues for Member States, true, but the concern is that compliance costs (which would likely be shifted to the taxpayer) may offset those revenues. Additionally, there are concerns over how much safe it is from double taxation, and over how it would be seen globally—given that the initiative largely targets US tech giants.

At this stage, there are still more questions than answers. Currently, without a consensus in the European Union, Member States are pursuing their own unilateral measures while waiting for an internationally accepted solution.

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