Documents considered by the Committee on 17 July 2019 Contents

2Digital Taxation

Committee’s assessment

Politically important

Committee’s decision

(a) (b) (c) Not cleared from scrutiny; update requested

Document details

(a) Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services (b) Proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence; (c) Commission Recommendation of 21.3.2018 relating to the corporate taxation of a significant digital presence

Legal base

(a) Article 113 TFEU; special legislative procedure; unanimity; (b) Article 115 TFEU; special legislative procedure; unanimity; (c) Article 292 TFEU

Department

HM Treasury

Document Number

(a) (39585), 7420/18 + ADDs 1–3, COM(18) 148 (b) (39586), 7419/18 + ADDs 1–3, COM(18) 147; (c) (39590), 7421/18, C(18) 1650 final

Summary and Committee’s conclusions

2.1These two proposals for Directives constitute the EU’s attempt to adapt Union-level and Member State arrangements regarding the taxation of digital companies to more adequately reflect the value that is generated by users based in the EU. Both proposals nonetheless remain broadly in line with the Government’s own thinking on digital taxation, as outlined in the Committee’s report on 13 June 2018.18

2.2In its most recent report on these proposals on 6 March 2019,19 the Committee noted that, following the failure of the Commission’s proposal for a Digital Services Tax (DST) (document a) to secure the unanimous support of the Member States in advance of ECOFIN on 4 December 2018, a Franco-German proposal20 had been brought forward which would reduce the scope of the proposal to the revenue which digital businesses make from advertising—a Digital Advertising Tax (DAT).

2.3The Committee granted the Minister (Rt Hon. Mel Stride MP) a scrutiny waiver to participate at ECOFIN Council in March, if the modified proposal was put to a vote, on the understanding that the Government’s support would depend on the extent to which its concerns were addressed. These concerns related primarily to there being more clarity regarding how the scope of the tax was defined and how revenues would be attributable to Member States. However, on 3 April 2019 the Minister informed the Committee21 that discussions on this compromise approach did not lead to consensus “given continued opposition from a number of Member States” and that “the Presidency has indicated that it will now be focusing on the EU’s position in international discussions on tax and digitalisation, given the OECD’s ambition to agree a final report on this issue in 2020”.

2.4Given that the Member States had chosen to prioritise the short-term “interim” DST/DAT, there has not been any progress on the second proposed Directive (document b) either. This had proposed to change existing corporate taxation rules by introducing a new form of permanent establishment based on ‘significant digital presence’, and laying down general principles for allocating profits to that presence which would allow for the market value of users and data to be taken into account. The Committee had previously concluded that the proposal was “speculative in character, because, to be fully effective, it would require third countries to modify their double tax treaties with Member States”, and noted the Minister’s comment in his Explanatory Memorandum that its principal effect was to provide “a basis upon which to explore options for global reform and may act to encourage non-EU countries to consider changes”.22

2.5The conclusions of the most recent meeting of the Economic and Financial Affairs Council on 17 May 2019 state that following the ministerial debate in March 2019 and the lack of unanimous agreement on the proposal, the presidency confirmed that work would continue on a two-track approach. The Council and member states jointly continue to work towards an agreement on a global solution at OECD level by 2020 to address the tax challenges of the digitalisation of the economy. If by the end of 2020, it appears that the agreement at OECD level is likely to take more time, the Council could, as necessary, revert to discussing a possible EU approach to the tax-related challenges arising from digitalisation. In addition, the proposal on significant digital presence is also still on the table of the Council for future follow-up.23

2.6It is thus clear that neither proposal has been formally withdrawn, and discussions regarding both could be reactivated (for example) if the OECD were to fail to generate a consensus approach in 2020. Nonetheless, the probability of any agreement on either proposal being reached by the Council on this issue appears low for the time being, as unanimity is required, and a number of Member States remain opposed to EU action in the absence of international agreement.

2.7In the meantime, a number of Member States, including the UK, France and Austria have plans to introduce their own Digital Services taxes domestically. Competition Commissioner Margrethe Vestager has endorsed unilateral Member State actions, stating that: “The best thing is a global solution, no doubt about that, but if we want to have results in a reasonable timeframe, Europe will have to step forward. I think the inconvenience of a fragmented digital taxation unfortunately is part of the push”.24

2.8We thank the Minister for his updates. We note that the revised Franco-German proposal for a scaled-back version of the Digital Services Tax (DST), which would have focused solely on revenue generated from advertising, failed to secure a majority in the Economic and Financial Affairs Council (ECOFIN) on 12 March 2019. The 17 May ECOFIN discussed the matter further and concluded that the Council and the Member States would pursue a “twin-track approach” to address the tax challenges of the digitalisation of the economy, continuing jointly to work towards an agreement on a global solution at OECD level, but if the OECD failed to agree an approach by the end of 2020, reverting to discussing EU action. ECOFIN also noted that the proposal on significant digital presence is also still on the table of the Council. Nonetheless, we remain persuaded that neither proposal is likely to progress through the Council, given the requirement for unanimity among the Member States, and fundamental opposition from countries including Ireland, Denmark, Finland and Sweden.

2.9We ask for the Minister to provide an update if significant progress is made in relation to either of the proposed Directives. As neither of the proposals have been withdrawn by the Commission, we retain these documents under scrutiny.

Full details of the documents

(a) Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services: (39585), 7420/18 + ADDs 1–3, COM(18) 148 ; (b) Proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence: (39586), 7419/18 + ADDs 1–3, COM(18) 147; (c) Commission Recommendation of 21 March 2018 relating to the corporate taxation of a significant digital presence: (39590), 7421/18, C(18) 1650 final.

Previous Committee Reports

Fifty-seventh Report HC 301–xlv (2017—2019), chapter 7 (6 March 2019); Forty-sixth Report HC 301–xlv (2017–19), chapter 14 (28 November 2018); Thirty-first Report HC 301–xxx (2017–19), chapter 4 (13 June 2018); Fifth Report HC 301–v (2017–19), chapter 10 (13 December 2017).


18 Thirty-first Report HC 301–xxx (2017–19), chapter 4 (13 June 2018).

19 Fifty-seventh Report HC 301–lvi (2017—2019), chapter 7 (6 March 2019).

20 See Proposal for a Council Directive on the common system of a digital advertising tax on revenues resulting from the provision of digital advertising services − Political agreement 6873/19.

21 Letter from the Minister to the Chair of the European Scrutiny Committee (3 April 2019).

22 Explanatory Memorandum from the Minister, HM Treasury (4 May 2018).

23 See Proposal for a Council Directive on the common system of a digital advertising tax on revenues resulting from the provision of digital advertising services − Political agreement 6873/19.

24 Politico.eu, “Vestager backs national digital tax plans” (8 March 2019).




Published: 23 July 2019