Would The Digital Services Tax Do More Harm Than Good?

On 21 March 2018, the EU Commission presented two Proposals for Council Directives specifically targeting the digital economy. One was about taxing corporations' significant digital presences, while the other introduced a new, common, interim system of tax on revenues that arise from the provision of certain digital services by tech companies of a certain size. This latter system is dubbed the digital services tax, or DST.

The DST is the EU's response to public demand for a harmonised approach to the long-standing matter of the taxation of the digital economy, and it comes at a time when EU countries are eager to take unilateral and uncoordinated measures.

It is supposed to be a temporary measure, lasting only until the EU and/or the international community can provide a solution for how to allocate profits in the digital economy. The original proposal lacked a sunset clause, but the most recent compromise text already provides for one: the Directive would expire upon the entry into force of an OECD-level solution or a set date (to be determined).

Since March, the DST has been the subject of much discussion and uncertainty. But one thing has remained clear: this matter is a very important one at the EU level and, although no consensus has yet been reached, the Directive will likely be approved next year and become effective from 1 January 2022.

However, will the DST really solve an existing problem, or will it merely create new ones?

The right aims, but questionable methods

The key issue driving this entire discussion is the taxation (or lack thereof) of profits. The DST's aim is to close the gap between the corporate taxation of digital firms and that of traditional ones, ensuring that taxation occurs where "value is created" which, according to the proposal, corresponds essentially to the location where the digital platform's users are.

The Commission is clear on the fact that the DST will coexist harmoniously with double tax treaties (DTTs), something that has been discussed widely with Member States. It's a key point because if the DST required DTT renegotiation with third countries, that would essentially negate its objective.

But, some critics have asked: what would stop the DST from being understood as an income tax? Indeed, it arguably doesn't differ hugely from taxes on gross service fees paid to foreign providers who have no permanent establishment in the countryin the sense that the tax follows the location of the user rather...