Opinion of the EU Committee of the Regions on Digital Economy Taxation, key points

The Committee of the Regions (CoR) is an EU advisory body that provides sub-national authorities (i.e. regions, provinces, municipalities…) with a formal say in EU law-making process.

On their plenary session December 5-6th 2018 the CoT adopted an opinion containing their Policy Recommendations and proposed also specific amendments to both the DST and SDP Directives drafts. As part of the legislative process, the official opinion is sent now to all the European institutions and published in the Official Journal.

The fundamental two observations from CoT are, first a concern that the shift to the new Digital Economy Taxation initiatives in general could benefit larger EU Member States with many consumers, with some inequalities being produced at the expense of smaller exporting EU economies.

And second, CoT urges Member States to share their portion of the DST proportionally with the local and regional authorities.
Other than that, following are the other take-over points of the CoR opinion we can collect:

  • The restriction of the scope of application of DST to the processing of user input only is legally questionable. CoR proposes replacing it by “largely reliant on user value creation”.
  • It proposes a straight Sunset Clause for DST.
  • To prevent the risk of hampering EU digitalization, it proposes the elevation of the thresholds for a SDP to be created, requiring a proportion of total revenues in excess of 10 €M, versus the 7€M of the draft, and requiring that at least 2 of the 3 conditions (versus only 1) are met for SDP to be formed and recognized as a taxable person.
  • Fine tunes article 5 of SDP draft to make sure the regulation itself is not “auto-imposing” the application of a credit system in respect to the Corporate Tax paid.
  • Proposal to remove a number of specific digital services from the long Directive draft list whose related activities could create a SDP: e-books & electronic publications, online newspapers, online news, traffic information and weather reports. The reason for that is that in the CoT opinion, they are not fundamentally different from their non-digital / “paper” equivalent.

On top of the disagreement existing between a few EU countries on the overall picture of this initiative, CoR has expressed strong consultative opinion over the points described. Some of those points are already resolved by the revised “compromise text” of the draft DST Directive, and others are not.

CoR opinion is not legally binding, but it is necessary to note that their view on the “user input only” issue it is one of a very structural nature if we consider how the DST is currently constructed.

Due to the non-direct taxation nature of the temporary measures in most of the countries working on them, as well as in the DST Directive, depending on how the qualification of the tax would be it is clear now that this tax allocation could generate some “intra-states” friction with local/state/province tax administration level, as they are raising their hands now.

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