In the past several years, many countries either implemented or began considering the Digital Services Tax (DST). This tax is the income tax for digital companies collected in the country where the business holds its operations. Approximately half of the EU have the DST tax in place or have been planning to enact it. The DST is already applied in Austria, France, Hungary, Italy, Poland, Portugal, Spain, Turkey, and the UK.
The DST-taxed companies differ country by country, with Hungary and Austria taxing digital advertising revenues, Denmark planning to tax video streaming specifically, and France covering a much broader base of activities.
This tax, which typically ranges between 1.5 and 7.5 per cent, has recently been a topic of discussion at the OECD (Organisation for Economic Co-operation and Development) level. It is argued that DST cannot reflect the scope of the digital economy properly, and it brings transparency and other issues internationally.
According to some OECD members, the main issue with taxing digital companies is paying income tax where the production occurs instead of where their customers are located. This can create taxation disparities as these companies usually derive income from selling services or products to users abroad.
The negotiations to change this status quo include over 130 countries at the OECD. The winning proposal, called Pillar One, would require multinational companies to pay at least part of their income taxes in the destination countries where their customers are located.
Pillar One would not complement the existing taxation laws. Instead, it would replace them, including withdrawing the DST and other conflicting regulations. It is planned that such a transition should take place by the end of 2023. In 2021, Austria, France, Italy, Spain, the UK, and the US issued a joint statement about rolling back the DST and the steps it will involve. The approach of these countries and Turkey, which agreed to the plan, include a double taxation avoiding crediting approach that will cover the tax for companies liable under both the DST and Pillar One regulations.
Pillar One and other new taxation proposals are changing how business should plan their operations. If you want to stay on top of the changes, please reach out to our experts at 1stopVAT, and we will help you navigate corporate taxation smoothly.