ECOFIN - Italy And Germany Compromise Digital Services Tax

The European Economic and Financial Affairs Council (ECOFIN) met to discuss various issues, including the European Commission's proposed digital services tax.

DST Key Issues

Following the informal ECOFIN meeting last September 2018, in which EU Finance Minister broadly agree on the need to implement Digital Service Tax (DST), recently another meeting was held to address two key issues related to the scope of taxable services and the question of the expiry of the directive - the so-called "sunset clause".

There are still differences between the EU Member States regarding the precise scope of services, which would be subject to the future tax. During the meeting in Brussels, the EU Finance Ministers discussed whether the sale of user data should be excluded from the scope of the DST, and if so whether technical solutions should be elaborated to prevent the circumvention of the taxation of online advertising. In response to this issue, most delegations expressed a preference for maintaining all three taxable services as proposed by the European Commission. Meanwhile, Finland, the United Kingdom, Germany, and Poland advocated the scope of taxable service be revised.

On the sunset clause, all member states agree that the directive is considered as expired once the solution to tax digital economy is reached at OECD level. However, there were diverging views as to how to proceed. France suggested in that respect that once adopted, the implementation of the DST could be delayed to the end of 2020, unless a global solution is found in the meantime.

Apart from the key issues of the discussion, the Austrian Presidency acknowledged that many delegations mentioned that further work is needed at the technical level, for example regarding the compatibility of the DST with double tax treaties, the proposal’s legal basis, or the cliff-edge effect of the minimum thresholds. The technical issues should be solved before the next Council meeting on 4 December to be able to reach an agreement.

The Response of Italy and Germany

Germany and Italy, along with France and Spain, first floated the idea of the temporary EU-wide digital services tax. They have offered a compromise proposal to gain the support of Ireland, Sweden, and Denmark.

During the ECOFIN meeting, Italy and Germany committed to implementing the OECD outcomes once the final report is delivered. At the same time, both countries agree to implement the proposed proposal on digital service tax if an OECD-led effort to achieve worldwide consensus on digital economy taxation fails. To the extent EU does not reach an agreement by December, Italy would adopt its own tax on a digital business model.

Besides, Germany encourages the commission to further develop and elaborate the proposal on digital service tax and present it in due time. Related to the proposal, the Minister of Finance in Germany, Olaf Scholz, opposes aspects of the Commission’s March digital services tax proposal concerning taxation of sales of data and the internet of things and would like to see the Commission’s proposal modified in this regard. Importantly, Germany suggested that the proposal should only target the highly digitized business model.

Sources: European Council, Economic and Financial Affairs Council (webcast)

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