Digital Sales Tax and the tax treatment of Digital Operators

The Organization for Economic Cooperation and Development announced on May, 31 its 2019/20 work plan on how to deal with direct taxation of companies operating in the digital environment.

The bottom line is that the operations of these companies exceed the old rules that deal with international taxation as established by the League of Nations 100 years ago and that distribute the tax capacity according to the physical presence of a company in a given territory.

These rules have, therefore, become obsolete in the face of digital operations, particularly in the area of corporate income tax, as the VAT rules have so far solved the problems with the principle of VAT at destination.

Companies operating in a digital environment have in common, among others, the following elements:

• High dependence on the intangible elements of the business, whether they are considered intellectual property or not.
• Development of the intangible element through the participation of users, and their digital fingerprint.
• Ability to have a notable presence in a jurisdiction lacking physical infrastructure in it.

The tax system, however, is governed by criteria such as the permanent establishment that require a fixed place of business, a physical presence with a certain permanence in time such as an office, a warehouse, long-term works, etc. Companies are, therefore, taxed in the countries in which they are resident and in those in which they have a permanent establishment.

Our current system is also governed by the fact that certain operations, such as the payment of interest, royalties or dividends are taxed in the country where the payer of that income resides.

The problem is, however, that an operator from a third country can sell data or introduce advertising on behalf of an advertiser without having any presence in the country in which the data is sold or in which advertising is made so that, nowadays, a foreign company can have a substantial digital presence in a country without paying tax there.

That is why the OECD is considering measures to allow the taxation of foreign companies with a substantial digital presence in a jurisdiction. It is intended to tax the benefit generated by interaction with users.

In the same way, they want to introduce rules that ensure minimum taxation in each transaction, thus preventing payments to low-tax companies from being deducted in the countries where they operate.

The OECD will work on proposals in this area throughout 2019, with recommendations expected as early as 2020.
As a reaction to the slow pace with which the OECD has been contemplating updating the principles of international taxation, the result of US resistance, a number of European countries are forcing the introduction of a 3% transitional levy on the sales of large digital emporiums.

The last PP government already announced the introduction of such a tax and estimated a tax collection of 2.5 billion euros. The Socialist Party took up the project again and included it in the failed fiscal proposals of 2019. It is likely to try again once it gets sufficient support in a future budget law. Now they hope to raise 1.2 billion.

The French parliament passed a similar law on July 4, coinciding with the American national holiday. The more realistic French are counting on raising 500 million euros.

As the big digital operators are generally American companies, they will reduce their profits and the amount of taxes they pay there with this measure. That is why the US administration has reacted by announcing a new increase in tariffs on more European products, probably including champagne and pâtés….

What is certain is that the non taxation of these new companies has strengthened, even more if possible, the balance sheet of North American technology companies and is one of the pillars of their astonishing financial success.

As the work of the OECD takes shape, we will be outlining the taxation of these transactions.