The October 2018 budget announcement that the UK would look to levy a digital tax on tech companies was the latest in a rash of similar announcements from policymakers around the world.
These developments mean that, today, digital businesses need to monitor movements in both VAT and corporation tax (CT) laws as they look to sell compliantly in the global market. In this article, we look at what countries have announced changes in this area of taxation.
European Union (EU) proposal
On November 6, the EU failed to agree on a plan for a temporary EU digital tax. The governments committed to work on an EU digital tax if an international agreement is not reached by late 2020. This decision followed an EU commission proposal from March 2018.
Bruno Le Maire, the French finance minister, hoped for an agreement in December 2018, but there was none.
On January 1, 2019, Turkey's tax on cross-border online advertising services came into effect. As with other similar moves the target of this new digital tax is large multinationals such as Google, Facebook, Twitter, Instagram and many others. More here.
A 2% turnover tax on physical and online broadcasting of audio-visual contents is mandatory since January 2018. The tax commonly called Netflix tax or youtube tax is used to finance the French centre for cinematography.
In mid-December 2018 France revealed details of its own 3% digital tax to be introduced on January 1, 2019. According to a BBC report the tax targets large technology companies such as Google, Apple, Facebook, and Amazon.
With EU technical negotiations progressing slowly, Spain released a draft bill on a digital service tax from 2019 applied at a rate of 3 per cent. Comments on the draft bill are now closed.
At the end of 2017, Italy acted unilaterally and enacted a new web tax law. According to the final version of the law, the web tax is:
- Levied at a 3% rate on the value of each digital transaction
- Due by residents and nonresidents enterprises rendering more than 3,000 digital business to business transactions in a calendar year and will not be creditable from the Italian income tax
- Settled by the buyers of the services
The new Italian web tax will be applicable starting from January 1, 2019, following the issuance of the implementation decree. At the moment, the decree has not been issued, so we are awaiting confirmation of the planned introduction date.
Australia is also seeking to evolve their corporate tax structure as the economy becomes increasingly digitalised.
A recent article in the Sydney Morning Herald provided additional context to this Australian Government initiative: "The discussion paper, released after a three-month Freedom of Information request from Fairfax Media, shows Treasury has its eyes on an interim measure that will tax fees received from Australian customers and an EU-style 3 per cent tax on social media advertising. But the steps are likely to be temporary as Australia pushes through complex international negotiations that will revolutionise the way digital business are taxed globally. By 2020, Australia wants the OECD and G20 to put a taxable value for the first time not just on products that are sold, but user data in a bid to stamp out a creeping erosion of the tax base."
Please note that the closing date for submissions has passed.
In January 2018 Taiwan introduced a corporate tax (CT) due on non-resident electronic service providers providing digital services. In effect, this tax is equal to 3% of turnover. It is calculated based on a 20% CT on Taiwan source income considered as 30% after 50% allowance as expenses.
This tax is due on all income from May 2017, which was the date they introduced VAT on digital services.
Uruguay introduced its VAT on digital services this summer. However, in addition to the VAT at 22% an income tax is potentially due by non-resident at a rate of 12% on turnover. This rate increases to 25% for non-resident businesses based in certain territories.
Chile has also been reviewing its legislation relating to cross-border digital sales. In August 2018, Chile’s Finance Minister Felipe Larrain revealed that such foreign-supplied digital services would be liable to digital tax at a rate of 10%. The moves are part of a broader aim to modernize Chile's tax structure. This will be different than the VAT that is at 19% in Chile
The bill would establish a 10% tax rate on digital services provided by nonresidents to Chilean individuals (independent of where servers may be located). The tax would apply to digital brokering services, digital content entertainment (either downloadable, streaming or other technology), advertising services (to be used abroad), use of, and a subscription to, a platform and technological services and storage services (cloud or software services).
The bill would establish electronic payment administrators (e.g., credit card companies) as withholding agents. The bill would require the Chilean Internal Revenue Service (IRS) to keep a list of both digital service providers and withholding agents.
Early September a draft decree was submitted in Mexico introducing a 3% digital services tax on gross income obtained from the following activities:
- Advertising in a digital interface directed to users.
- Providing users with a multifaceted digital interface that allows them to locate and interact with other users, and that can facilitate the delivery of goods or services directly between users.
- Transmission of collected data about users that is generated in digital interfaces.
This tax will not apply to the first 100 million pesos of income obtained by natural and legal persons resident in Mexico, as well as by foreign residents with a Mexican permanent establishment (PE). It will also not apply to income from the provision of a digital interface when the sole or main purpose of the entity is to provide digital content to users or to provide communication services or payment services; to the provision of financial services; or to the transmission of data by a financial services provider.
From April 2019 India is introducing a significant economic presence rule that will primarily impact companies from countries without a double tax treaty with India. The rules being discussed are as follows:
Significant economic presence under the 2018 Union Budget changes means a:
- Transaction in respect of any goods, services or property carried out by a non-resident in India including the provision of the download of data or software in India if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or
- Systematic and continuous soliciting of business activities or engaging in interaction with a number of users as may be prescribed in India through digital means.
At the time of its introduction, the government had clarified that thresholds for the specified value and number of users would be determined in consultation with the stakeholders. Consultation sessions were organised during the months of July and early August. However, we have not seen the feedback yet or the quantum. It should also be noticed that the application of these rules will be limited due to the double tax treaty in place. However, it was said that this will be added to the treaties at the time of renegotiation.
Note that, since 2016, India has already an equalisation levy at 6% on online advertising revenue.
While VAT at 10% on electronic services is not in place yet it is expected for 2019. In the meantime, the Indonesia Ecommerce Association (idEA) was discussing a 0.5% tax from each marketplace seller at the beginning of the year with the Finance Ministry. At the time of writing nothing has been implemented.
What does this all mean?
What is clear from the amount of discussion, chatter and announcements relating to CT on digital services, it is likely that we will see the number of countries introducing CT on digital services continue to rise in the coming months and years.
In the meantime, all eyes are on the continuing work of the OECD towards developing a digital tax report with international backing. This report is due to be completed in 2020.