Digital Services Tax: Unilateral Initiatives on the Move

Feb. 15, 2021, 8:00 AM

The introduction of a Digital Services Tax (DST) to ensure that profits are taxed where economic value is created has been object of tough debate over recent years.

The Global Context

The unilateral attempts of single countries to tax multinational companies active in digital business was initially addressed at EU level by the European Commission, which tried to propose a harmonized set of rules to tax companies rather than leaving this to individual EU member states.

However, despite attempts to reach an agreement, EU member states have been unable to reach a compromise on their own proposals and the European Commission has since conceded it will wait for progress at the Organization for Economic Co-operation and Development (OECD) level and revisit its proposals again in 2021 if no progress is made. The Covid-19 pandemic has also severely impacted this timetable.

In the absence of this full-fledged multilateral solution, several EU member states started to introduce their own initiatives for national taxes on digital companies which would include “sunset clauses” and expire if an agreement is reached at international or EU level. Such initiatives may potentially lead to double taxation and differing views of the transactions covered, and have also increased tensions at the global political level.

The main role in the harmonization is currently in the hands of the OECD, which urged all parties to remain “engaged in the negotiation towards the goal of reaching a global solution” citing the risks associated with an uncoordinated group of unilateral initiatives, including “trade tensions” and potentially a “trade war.”

Following retaliatory measures introduced against France through the application of specific tariffs on French products, on June 2, 2020 the United States Trade Representative (USTR) launched further investigations into digital taxes adopted or being considered by other countries, like Italy, Turkey, Spain, U.K., Austria, Czech Republic, citing discrimination against U.S. companies and unreasonable tax policies. However, the new Biden administration seems to be pursuing a solution at global level rather than imposing restrictions on countries that have planned or have already implemented a DST.

The points under discussion between the EU and U.S. are the two Pillars that the OECD have proposed as a compromise. The OECD has anticipated that Pillar One and Pillar Two will apply to both automated digital services and consumer facing businesses.

Pillar One focuses on profit allocation and nexus rules applicable to business profits in market/user jurisdictions where there is an “active and sustained participation of a business in the economy of that jurisdiction through activities in, or remotely directed at, that jurisdiction.”

Pillar Two focuses on ensuring that large internationally operating businesses pay a minimum level of tax based on a global minimum tax rate for baseline activities regardless of the jurisdictions where they carry out their operations, or the location of their headquarters.

As mentioned above, irrespective of and in parallel with the OECD work, national governments and revenue agencies have developed and introduced their own rules, also with the aim of putting pressure to the global discussions. There are a number of important updates to this process to be considered in some key countries, as we consider below.


The focus is currently on Italy, which has just approved the final implementation regulations regarding DST payment, after DST being in force since January 1, 2020. After many years, Italy is, therefore, ready to collect DST.

The implementation regulations have been finalized after a consultation that was launched among the business and tax community and was concluded on December 31, 2020, to which more than 40 comments were submitted.

Due to the very close deadlines and the need to address a number of preliminary formalities, payment and filing obligations have been postponed by one month with respect to initial dates only for the first year (i.e., March 16, 2021 for payment and April 30, 2021 for filing).

The regulations tried to clarify the general framework and provide interpretation with respect to certain issues that were raised following the publication of the DST law. As a general comment, it should be remarked that not all doubts have been resolved and certain open questions have still to receive a specific answer. The issuance of a circular letter has been announced. However, taxpayers are now in the position of implementing the actions to actually pay DST for 2020.

DST will apply at a 3% rate on transactions deriving from advertising services, intermediation and marketplace and data transmission. The taxable base is not reduced by any “costs” but is net of value-added tax (VAT) and other indirect taxes.

The payment will be made based on a cash principle approach and the taxable basis will be calculated according to a specific ratio applicable to the different type of services.

The regulations confirm that those subject to the DST are entities which, individually or as a group, in 2019:

  • recorded total worldwide revenues equal to or greater than 750 million euros ($908.4 million); and
  • collected total revenues only from digital services in Italy equal to or greater than 5.5 million euros.

Both foreign and Italian entities will fall within DST when within the above parameters.

Inter-company transactions of digital services are excluded from the scope of the tax.

The regulations focus on the specific formalities and requirements to compute, pay the tax and file the DST return, which appear to be extremely burdensome from an administrative perspective.

It is possible in the case of group companies to appoint a designated company, which may comply with all the DST formalities (i.e., payment and DST return) on behalf of the affiliate entities, based on the data and information provided by each entity. The designated company could also be an entity being a DST subject even if not resident in Italy.

Irrespective of the appointment of a designated entity, each of the entities of the group should have or obtain a fiscal code in Italy if they are not resident or established in Italy. In case of the presence of an affiliate entity of the group in Italy, the latter will be responsible for the DST payment of the other entities of the group, even if it is not a DST subject.

The calculation of DST must be done separately for each entity which remains jointly responsible for the correct payment and the filing obligations.

If the nonresident entity is located in a non-cooperative country, a representative shall have to be appointed in Italy.

To proceed with the actual payment and filing of the DST return, the payment code, the DST form and related instructions are in the process of being approved; the DST form was approved January 25, 2021, while the payment code will be issued soon.


France is the first EU member state to have implemented the DST, which retroactively entered into force on January 1, 2019.

The scope of the DST in France focuses on the value of digital services supplied in France. Consequently, the business activities within the scope of the DST are:

1. the supply of a digital platform allowing users to interact with other users and notably in order to facilitate the direct provision of goods or services between users.

The supply of a digital platform should be in principle considered as provided in France during the calendar year when one of the users of a platform is located in France.

DST does not apply to the supply of digital platforms that do not have as a main objective connecting users with the aim of collecting data.

Therefore, as long as businesses use the digital interface principally to supply users with (i) digital content such as e-commerce, video services, music on demand, (ii) communication services, (iii) regulated payment services, the supply of the digital platform should not be taxable.

When the digital interface is used to manage specific regulated financial systems and processes such as interbank settlement, the supply of the digital platform is also not taxable.

Further, where the digital platform, as a main purpose, allows the purchase or sale of services aimed at placing adverts, the supply of the digital platform will not be taxable but the supply of these services to advertisers will be taxed.

These services will be deemed to be supplied in France during the calendar year if the conditions below are met:

  • when the digital platform allows the provision of supplies of goods and services directly between users—a transaction is concluded during the calendar year by a user located in France;
  • for other kinds of platform—one of the users has an account opened from France during the calendar year allowing him access to all or part of the services available on the digital platform.

2. the supply of services to advertisers which aim at placing on a digital platform targeted advertising content generated by personal data collected on digital platforms

The services can include acquisition, storage and delivery of adverts, advertising control and advert performance measurement as well as a user’s data transmission or management.

These services will be deemed to be supplied in France during the calendar year if the conditions below are met:

  • for the sale of data generated or collected from users’ activities on digital platforms—when the data sold during the calendar year are derived from the consultation of one of these digital platforms by a user located in France;
  • in other cases—when an advert is placed during the calendar year on a digital platform according to data derived from a user consulting this digital platform while located in France.

The French DST excludes inter-company transactions.

The French DST sets out two keys thresholds, both of which must be met by businesses for the DST to apply:

  • 750 million euros yearly turnover as regards digital services supplied worldwide; as well as
  • 25 million euros turnover on digital services in France.

France has complied with the EU’s proposals on the rate and has applied a 3% tax on the revenues derived from the digital services mentioned above. The person liable to pay the 3% DST is deemed to be the company which receives payment for these digital services.

The taxable part will therefore depend on the percentage of the payments which is related to France. The computation of the percentage representing the part of the services allocated to France for the calendar year will depend on the type of services above and on the type of platform.

Please note that the payments received in counterpart of the supply of digital platform facilitating the sale of excise goods should not be taken into account.

Unlike the U.K. tax (see below), the French DST is not deductible from corporate income tax but from another French tax named C3S (social solidarity contribution), formerly known as “organic tax.” This mechanism, rather than a possible deduction of the DST from corporate income tax, has prevailed as France wanted to avoid a re-qualification of this tax under bilateral treaties.

However, a French association, ASIC (Association of Internet Community Services), has stated that this measure of allowing taxpayers to deduct the DST from the organic tax should be considered as state aid and that the EU Commission would need to be notified.

In terms of the compliance burden on impacted business, the administrative reporting and compliance framework of the DST will be aligned with the existing VAT framework.

After a speech by President Trump indicating that there would be retaliatory action on certain French wine imports if the French DST was implemented, the leaders of the G-7 group of nations issued a brief declaration on the international DST to conclude their Summit in Biarritz. After this Summit, dated August 29, 2020, President Macron also stated that if it appears that an international agreement is in place on a DST, the French DST will be repealed.

The French President also commented that if it appears that the tax taken by the international DST is lower than the tax take generated by the French DST, the difference would be refunded to businesses.

On February 10, 2020, the French government indicated that the down payments related to the French DST which were due in April and October 2020 could be postponed until December 2020, without any application of late payment interest or penalties.


In March 2020, the U.K. government published its Finance Bill 2020, which included the outline for a 2% DST on the revenues of:

  • search engines which search more than a single website;
  • social media services, where sharing user-generated content is a significant feature of the service; and
  • online marketplaces irrespective of how they monetize their platforms, with the exemption of financial and payment services;

which derive value from U.K. users.

DST has applied since April 2020 and will raise a forecast 280 million pounds ($386 million) in its first year, with collection starting in 2021, rising to 390 million pounds thereafter; making it a relatively small contribution to the U.K. Treasury’s overall tax revenue but nevertheless an important consideration for companies whose activities fall in scope. The parameters for how the DST works in practice are described below.

Tax liabilities are calculated at group level but charged to individual entities in the group whose revenues involving U.K. users contribute to the tax thresholds in proportion to their contribution. The thresholds mean that it only applies to groups with global revenues over 500 million pounds and U.K. revenues over 25 million, which includes an allowance, so that a group’s first 25 million pounds of revenues derived from U.K. users will not be subject to the DST.

There are different considerations as to what constitutes participation by a U.K. user, depending on the activity in question.

In respect of online marketplace transactions, these are considered to involve U.K. users if at least one of the parties is U.K. based; however, the tax revenue charged will be reduced by 50% if the other user is located in a country with a similar tax to the DST. With regard to the advertising revenues, these are considered to have derived from U.K. users when the advert is intended for, viewed, or otherwise consumed by U.K. audiences.

A “safe harbor” principle is available for in-scope companies which operate low profit margins or losses, allowing such entities to use an alternative basis of charge to calculate their liabilities and effectively leading to a lower DST liability, or no liability if they are loss-making.

DST is deductible as an expense of business, provided it is incurred wholly and exclusively for the purposes of a trade. However, it is not creditable against any U.K. corporation tax liability. This may result in double taxation.

Looking forward, like the EU member states with their own tax initiatives, the U.K. government has committed itself to finding a solution at international level, yet the tax itself does not include a specific “sunset clause” that would automatically withdraw the legislation. Rather, the U.K. government has given itself some flexibility by stating that it will dis-apply the DST “once an appropriate international solution is in place” and carry out a review in 2025.


Spain is also on the move; the Spanish DST Law was approved in October 2020, although it came into force for the first time January 16, 2021. However, although the Spanish DST Law has been enacted, further regulation describing how to effectively settle the tax burden has not been released as yet; there are therefore still several outstanding practical issues concerning DST implementation (such as the self-assessment form to be filed) which need to be clarified.

The Spanish government has forecast collecting 968 million euros per year through the DST.

Spanish DST is acknowledged as an indirect tax, and therefore would not fall within the scope of double taxation treaties signed.

As envisaged in other jurisdictions, DST will be applicable to the extent that specific revenue thresholds are met:

  • net revenues during the prior calendar year exceed 750 million euros; and
  • the total amount of revenues derived from the development of the activities subject to DST in Spain during the prior calendar year exceeds 3 million euros.

It is not relevant whether or not the taxable persons are established in Spain.

Corporate groups would need to determine whether these requirements are met at the group level. Thus, if both requirements are met on a group basis, every individual entity in the group which renders these services in Spain would be liable to DST regardless of the individual amounts of revenue (likewise Italy).

Taxable revenues are those arising from the following activities:

  • online advertising services;
  • data transmission services; and
  • •intermediation services.

The digital services in scope are deemed to be carried out within the Spanish territory whenever the user is located in Spain. In particular, several localization rules have been set for each type of taxable digital service.

The overall revenues obtained from the activities listed above, VAT excluded, constitute the DST taxable base. DST is levied at 3%.

With regard to obligations and formalities, the DST Law provides that DST returns shall be filed on a quarterly basis. Due to the lack of further regulation on the DST for the time being, the deadline to file a DST self-assessment corresponding to the first quarter 2021 (first DST self-assessment due) has been postponed until July 2021.

The Spanish DST Law acknowledges that the rules are aimed at covering an interim period until the EU DST Directive is finally approved, in which case local regulations would be amended accordingly.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Giuliana Polacco is Senior Counsel and Annarita De Carne is Senior Associate with Bird & Bird Italy; Simon Gough is Legal Director with Bird & Bird in London; Montserrat Turrado is a Partner and Lara de la Rosa is an Associate with Bird & Bird in Madrid; Sophie Dorin is Counsel with Bird & Bird in Paris; Willem Bongaerts is a Partner with Bird & Bird in The Hague.

The authors may be contacted at: giuliana.polacco@twobirds.com; annarita.decarne@twobirds.com; simon.gough@twobirds.com; montserrat.turrado@twobirds.com; lara.delarosa@twobirds.com; sophie.dorin@twobirds.com; willem.bongaerts@twobirds.com

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