Nine countries have already enacted DST legislation — UK, France, Italy, Austria, Spain, Czech Republic, Poland, Turkey and India — while the remainder have DST legislation pending or on hold. Many of these tax laws feature “sunset clauses”, which mean they will expire if an agreement is reached at either the OECD or EU level — but there is no guarantee that countries will allow these taxes to lapse or withdraw them as part of an OECD or EU agreement. Additionally, some DSTs are being developed at the subnational level. For example, the US state of Maryland approved the country’s first tax on digital advertising, which is being challenged in court.
As Gijsbert Bulk, EY Global Director of Indirect Tax, says, “This proliferation of local DSTs has given rise to a confusing global tax landscape featuring a mix of VAT, customs duties, levies, withholding taxes, extra-terrestrial taxes and hybrid digital transaction taxes, each with their own taxable rate, global revenue and local revenue thresholds.”
With each country designing its own digital services tax, the cost and complexity of achieving compliance can rapidly become prohibitive.
Nicoletta Mazzitelli, Tax Partner at Studio Legale Tributario EY, based in Rome, has had first-hand experience of dealing with Italy’s new digital services tax and provides useful insight into its scope. “The Italian DST has a rate of 3% and was applicable from the 1 January 2020,” she explains. “Tax is due from any single entity or group which exceeds the following thresholds: worldwide revenues over €750 million and digital services revenues sourced in Italy of over €5.5 million.”
The Italian DST covers digital advertising, social media and goods and services platforms — it also covers the sale of data collected from users.
Channing Flynn, EY Global International Tax and Transactions Services Partner, Tax Technology Sector Leader and Digital Tax Leader, outlines the real-life impact of such unilateralism: “If a company operates in 80 or 90 countries, the danger is that they will have to run 80 or 90 different tax calculations in order to remain compliant,” he says.
Flynn also notes that these companies will then have to consider how this complexity funnels through to the economics of their organization — how they price and what’s the cost of doing business in certain jurisdictions. “As you can see, this all becomes incredibly complicated very quickly,” he says.
Faced with this labyrinthine level of complexity, it’s clear why many countries and businesses hope the OECD can achieve a consensus-based coordinated approach to applying income tax principles to digital activity. Key countries such as the US must be a part of the agreement in order for any new global tax regime to be viable.
In the US, the Trump administration found the French DST discriminatory against US companies and proposed 100% tariffs on select French-origin goods totaling $2.4 billion; DSTs in Austria, Brazil, the Czech Republic, the EU, India, Indonesia, Italy, Spain, Turkey and the UK also were found to be discriminatory2. No further action has been taken on these findings and the Biden administration has not yet weighed in on these trade matters.
Plotting the way forward
Faced with uncertainty and increasing levels of complexity and cost, what steps can digital services companies take to ensure they remain compliant? Michalak says, “Unilateral digital services taxes are real and they’re happening right now. Organizations need to keep a close eye on how and where these taxes are being enacted, and what this means for their levels of tax exposure.”