When in early 2019 Belgian MPs picked up the EU Commission's 2018 proposal for a digital services tax (DST), it did not get much traction. Despite general support for the underlying principles, the proposal was rejected by the Budget and Finance Committee of the Belgian Parliament in March 2019. Most political parties considered that Belgium should not be at the forefront of this type of initiatives and await consensus for a long-term solution to be agreed at EU or G20/OECD level.
Twelve months and one pandemic later, the momentum for a Belgian DST seems to grow. Where does this DST come from, and is it a good or a bad idea?
New tax rules for the digitalised economy
The digital revolution has led to the emergence of new business models. These economic mutations raise new international tax challenges. Thanks to new technologies, businesses in the digital sector can capture the value creation attached to users located in a country without having a physical presence in that country. This results in a mismatch between the locations where tax is imposed and where value is created.
The work undertaken by the OECD under the action plan on base erosion and profit shifting (BEPS) paved the way for a detailed examination of the taxation of the digital economy at an international level.
However, as part of the BEPS action plan no consensus could be reached on measures addressing the fundamental issues raised by the digital economy (the most striking of which was the overhaul of the concept of permanent establishment and the definition of a new nexus test based on ‘significant economic presence’).
Further work by the OECD/G20 Inclusive Framework (which groups 137 countries and jurisdictions) resulted in concrete proposals divided into two ‘pillars’:
- Pillar One focuses on profit allocation and nexus. It is designed to adapt taxing rights by taking into account new businesses models and thereby expanding the taxing rights of market jurisdictions (which, for some business models, is the jurisdiction where the user is located).
- Pillar Two seeks to ensure that profits of international businesses are subject to a minimum level of taxation. It would provide jurisdictions with a right to 'tax back' where other jurisdictions have not exercised their primary taxing rights, or where payments have been subject to low levels of effective taxation. The Pillar Two proposal is also referred to as the GloBE proposal.
These proposals would significantly re-write international tax law principals and are obviously complex to agree on. The COVID-19 crisis will also likely delay international consensus that was planned to be reached in 2020.
Digital services tax (DST)
Some EU member states did not want to await international consensus. They put political pressure on the previous European Commission to move forward at EU level. Though supporting the OECD’s proposed approach to fundamentally rethink existing tax systems, the Commission in 2018 effectively proposed a digital services tax (DST), a revenue-based tax specifically targeting digital giants.
The EU proposal is still in draft form as agreement could not be reached due to the opposition of a handful of member states (unanimity within the Council of Ministers is required for EU tax matters). The Commission’s legislative proposal and the various amendments proposed by the Council are still officially on the table but have been put on hold in the hope that a more comprehensive compromise will emerge at OECD level (see above).
Notwithstanding, some EU member states have decided to move forward as is shown, for example, by the DST measures recently adopted in various EU jurisdictions, including France, Austria, the UK, Italy and Spain. In most cases, these unilateral initiatives are described as being temporary measures that will disappear as and when an international agreement is reached.
Other countries have also introduced similar taxes or are looking at doing so. Most recently, a draft bill on a digital services tax was proposed to the Brazilian National Congress.
The Belgian DST
According to the current proposal for a Belgian DST (see proposal in Dutch and French), the so-called 'digital giants' would become subject to a 3 per cent tax on (gross) income from certain digital activities in Belgium. The proposal is highly inspired on the EU Commission’s proposal and can be summarised as follows.
In order for an entity to qualify as taxpayer for DST purposes in any tax year, the following thresholds must have been exceeded according to the most recently available accounts:
- a consolidated worldwide turnover of €750m (according to an amendment on the initial proposal, only taxable turnover would count); and
- income from taxable digital activities generated in Belgium of €25m (according to an amendment on the initial proposal, this threshold would be reduced to €5m).
Income from the following services would be qualified as taxable income:
- advertising – the placing on a digital interface of advertising targeted at users of that interface;
- software and applications – the making available to users of a multi-sided digital interface which allows users to find other users and to interact with them, and which may also facilitate the provision of underlying supplies of goods or services directly between users; and
- big data – the transmission of data collected about users and generated from users' activities on digital interfaces.
Income will be deemed generated 'in Belgium' if the users of the taxable activities are located in Belgium in the relevant year.
Taxable income refers to the total gross income, net of VAT and other similar taxes.
According to the initial proposal, the DST would not be a deductible expense for income tax purposes but would be creditable against income tax due, subject to certain conditions. An amendment to the initial proposal however deletes the tax credit and confirms that the DST is tax-deductible for income tax purposes, thereby confirming the nature as an indirect tax.
The DST would cease to have effect once an international solution agreed at EU or OECD level enters into effect.
A good/bad idea?
It may be politically appealing to move forward with a DST now. It would address a (justified) concern around a mismatch between the location where tax is imposed and where value is created; it would generate additional taxes, much welcomed following COVID-19 government relief and recovery measures; and other EU member states are doing the same, so what are we waiting for?
However, the proposed DST raises significant concerns. First, there are still many unanswered technical questions on the interaction with the existing tax rules. One basic question: is this DST a turnover tax or an income tax? If it is a separate income tax, as is suggested by the initial proposal pursuant to which the DST could be credited against the income tax due, then it may largely remain dead letter due to incompatibility with double tax treaties. However, pursuant to an amendment on the initial proposal, the indirect tax nature would be confirmed (see above).
The rather targeted (and thus selective) nature of the DST also raises questions on compatibility with constitutional and EU law. For instance, the reason why the DST should only apply to (very) large entities may not be obvious in light of the purpose of the proposal. Also, the delineation of taxable services creates a differentiation which may not always be consistent, or even appear arbitrary. There is little doubt that such DST will be challenged on grounds of incompatibility with the Belgian constitutional principle of equality and even under EU state aid rules.
Finally, introducing unilateral measures may potentially trigger (geo)political tensions, notably with the US, as shown by the transatlantic fight over France’s new unilateral DST. On June 2, the Office of the US Trade Representative officially announced an investigation into digital services taxes adopted or proposed by EU countries. With the economy already impacted by COVID-19 and Brexit, Belgium does not want to be caught in the middle of a tariff escalation.
However (politically) attractive as it may seem, a DST raises a plethora of legal issues, not to mention potential geopolitical repercussions