After receiving a huge number of comments from public stake-holders during the public consultation period, the Spanish Government approved an additional stage of the digital-services tax regulatory process at a cabinet meeting last January 18th.
The Spanish DST draft law still require parliamentary approval before entering into effect.
The tax, she said, is referred to platforms that were working on a “privileged manner” and expressly said it was representing “unfair competition”.
She is not a technical person from the Minister of Economy nor Taxes, but in the explanations she provided she mentioned that the tax is aimed at “Platforms”, describing them as elements that put users in contact, precising also that the type of digital advertising to be taxed is “Targeted on-line advertising” that has “already studied user preferences and behaviors….”.
As indicated in our previous DET3-post, the tax follows quite closely the EU Draft Directive text, and it will apply to companies with global revenue above EUR750 million, that generate at least EUR3 million of “in-scope” digital-services revenue in Spain.
Relevant changes and DET3 Comments
The key changes the text incorporates after the public hearing are the following:
• Confirmation that in the “in-scope” data transfers there is only place for those being supplied for consideration (being priced and charged).
The text precise that not only sales but also licenses of user generated digital data. No precision about sales of data captured with sensors (IOT) or sale of data by a regulated financial entity as not subject to the tax like in the updated version of the EU DST Directive draft released during last December ECOFIN.
• A new definition of “Targeted Advertising” is inserted in the text, whereby “any form of digital commercial communication aiming to promote a product, service, or brand, targeted to the users of a digital interface through the data collected from them” would fall into it.
The most concerning inclusion here is a “Iuris Tantum presumption” that all advertising is “targeted”.
Charging the burden of proof to the tax payer in this complex determination is something that might generate important friction levels and cumbersome workload and analysis for companies above the 750EM threshold in any industry and not only digital players as more and more companies are moving to platform-based business models or have develop a deeper company website-based interaction as the first step of such transformation.
All these is connected to the inclusion of an additional formal obligation for companies to “establish the systems, mechanisms or agreements” enabling the user devices localization for the purposes of this tax application, and its connected new penalty regime around hiding IP addresses.
• A relevant difference with the EU draft was the fact that Inter-company transactions fall in scope of the Spanish DST.
Like in the targeted advertising case, we worked with the General Taxation Directorate during consultation to assist illustrating the practical cases where that measure could generate important inconsistencies across international value chains and multiple taxation situations difficult to correct.
The evolved text temper this inclusion down, by excluding transactions with related parties with 100% direct or indirect participation. It won’t resolve all cases but is a very welcome measure by the Multinationals community.
• Elimination of the difficult previous definitions about “systematic internalizers….” etc. in the financial services industry, being replaced by the introduction of a more understandable definition of “Regulated Financial Services” and “Financially Supervised (regulated) entity”.
This is in line with the last version of the EU Draft Directive released previous to last December ECOFIN.
• Penalty CAP: Establishment of a range & CAP for the 0,5% penalty charged on last year Net Revenue in the case of being fined for not having appropriate control on the process of determining if user device was in Spanish taxable territory. Minimum penalty will be €15.000, and caped to €400.000.
If the Tax gets final approval in Parliament, smooth cooperation between the technological and technical arms of the Spanish Tax Administration in their analysis to ensure adherence to the “place of realization” declaration obligation should be required, but the new and additional formal obligation explained above moves a relevant part of that effort to the tax payer’s side.
The Italian and Spanish local DST versions are making progress towards approval with the draft Directive “full scope of services version”; That means the 3 initially targeted services in scope, not less, not more.
If the Franco-German approach generates a reduction in the scope in case of a potential unanimous agreement at EU level next March, both Governments will need to re-evaluate their internal timings or correct it the following years budget law (Spanish elected option). Likely the deficit levels pressure affecting both countries will impact their decisions.
On that, French Finance Minister Bruno Le Maire said yesterday that at EU level he is “convinced that a deal is within arm’s reach between now and the end of March” after the adjustment and alignment of the German-French positions.
In any case, he is firmly supporting EU Commission plan to eliminate the EU tax veto and has regrouped forces internally to have the French DST version ready in parallel.
A version that could tax Digital companies with WW gross sales higher than 750 million and 25 million euros of in-scope services in France, with a tax rate up to 5% and an a very expeditious regulatory approval process expected.