Governments in numerous countries are looking at the introduction of a tax on digital services as a means of ensuring fair taxation of new business models. This Insight will consider digital services tax developments in France and Russia.
On March 6, 2019, the French government presented a bill on the taxation of large digital enterprises (“the Bill”) with the aim of introducing a domestic digital services tax (“DST”) comparable to the tax proposed in 2018 by the European Commission.
The presentation of the Bill follows an announcement made by the Minister of the Economy and Finance that an agreement on such tax is no longer expected at EU level.
The main features of the French DST are as follows:
- the tax will apply to resident and nonresident companies with a worldwide turnover exceeding 750 million euros ($842 million) and a French turnover exceeding 25 million euros;
- the tax base will be the French-source turnover derived from online advertising, from the sale of personal data for advertising purposes and from the provision of peer-to-peer online platforms. Among other services, the following are excluded from the tax base: online sales of goods or services (including digital services such as video-on-demand or music-on-demand), payment or e-mail services, regulated financial services and sales of personal data not obtained through the internet. The French-source turnover will be calculated using a digital presence coefficient based on the proportion of French users;
- the rate of tax will be 3 percent;
- the tax will be deductible from the French corporate income tax base, if any; and
- the tax will apply retroactively with effect from January 1, 2019 and until an agreement on the taxation of the digital economy is concluded at OECD level.
The law defines e-services as services delivered over the internet or similar electronic networks that are automated and rely on information technologies, including the following:
- provision of the right to use software, including online games and databases, in particular, by granting remote access, as well as updates and additional functions;
- provision of advertising services on the internet, in particular, by using web-based software and databases and the provision of advertising space on the internet;
- provision of services for placing offers for the acquisition (sale) of goods, work and services, and property rights on the internet;
- provision of services relating to the provision of web-based platforms for establishing contacts and/or concluding transactions between buyers and sellers, including the provision of a web-based online trading facility where potential buyers offer their price through an automated procedure and the parties are notified of a sale by an automatically generated message;
- provision and/or maintenance of a commercial or personal presence on the internet, electronic resource support (such as website and/or web page support), securing access to websites/web pages for other web users and the provision of facilities that allow users to modify such resources;
- data storage and processing where a person who provided data has internet access to the data;
- online provision of computing capacity for the purpose of placing information in an information system;
- provision of domain names and hosting services;
- remote system administration and support of information systems and websites;
- services performed automatically through the internet once a purchaser inputs data;
- provision of automated data searches, their sorting upon a specific request and provision of sorted data through an information and telecommunications network (including online stock exchange reports and online automated translations);
- provision of rights to use e-books and other e-publications, information and educational materials, images, music with or without lyrics and audiovisual content through the internet, including by providing access to watch or listen through the internet;
- provision of search services and/or information to the purchaser on potential customers;
- provision of access to internet search engines; and
- web-based statistics management.
The following supplies are specifically excluded from the list of e-services:
- the sale of goods and services ordered over the internet where the delivery is made without the use of the internet;
- the sale or transfer of rights to use software (including online games) or databases on tangible media;
- the provision of consulting services via e-mail; and
- the provision of internet access.
A foreign supplier of e-services is required to register for tax purposes in Russia if it:
- provides e-services to private individuals (other than private entrepreneurs) and the services are deemed to be supplied in Russia;
- Is involved in “direct” settlements with private customers (the law does not define a direct involvement in settlements, nor does it specify whether receiving payments from payment aggregators would be deemed to constitute “direct involvement in settlements” with private customers); or
- does not render e-services through a fixed establishment in Russia.
The law does not state a sales threshold for tax registration of e-service providers. A foreign intermediary (which, together with registered business customers, is defined as the tax agent for VAT purposes) is subject to the tax registration requirement if such entity:
- acts under a commission, an agency or any similar arrangement with foreign entities rendering e-services deemed to be supplied in Russia;
- is directly involved in settlements with private customers (if there are several intermediaries in the supply chain, the intermediary that is directly involved in settlements with private customers is required to register regardless of whether it concluded an agreement with the foreign supplier of e-services); or
- does not carry out relevant commercial activities, involving the direct settlements with private customers, through a fixed establishment in Russia.
If a Russian intermediary is involved in the provision of e-services (based on commission, agency or other similar agreements) and direct settlements with private customers, such intermediary should act as a tax agent, allowing foreign intermediaries and service providers to forgo tax registration in Russia.
E-services are subject to value-added tax (“VAT”) in the country where the customer (an individual or a business entity) is located. A private customer purchasing e-services is deemed to be in Russia if one of the following conditions is fulfilled:
- a private customer is a Russian resident;
- payment is made through a bank/e-payment operator located in Russia;
- a customer used a Russian IP address to purchase e-services; or
- a customer used a Russian telephone number to purchase e-services.
The place of supply of e-services should be confirmed by the Registers of Operations (a register which basically captures data that a user is a resident of Russia through an IP address or where the service recipient provides its registration details online: this is a requirement in Russian VAT law) proving that the e-services are supplied in Russia according to the above conditions and disclosing the service fees charged.
The tax base for business-to-consumer e-service supplies made by foreign entities is the VAT-inclusive service fees and the VAT amount due is calculated at a rate of 15.25 percent applied to the tax base. VAT is due by the 25th day of the month following the reporting quarter.
The tax base is determined on the last day of the calendar quarter in which the (partial) payment from the customer is received, i.e. VAT will be accounted for on a cash basis. Where service fees are quoted in foreign currency, the tax base will be calculated in Russian rubles based on the exchange rate established by the Central Bank of Russia on the day of determining the tax base.
Foreign suppliers of e-services are not able to claim Russian input VAT for offset against output VAT charged on taxable supplies of e-services, unless e-services are provided through separate divisions of foreign suppliers.
On January 18, 2019, the Federal Tax Service issued Guidance Letter No. SD-4-3/687 clarifying that electronic services provided by a nonresident supplier are subject to VAT in Russia, even if the services are provided through information and telecommunication networks other than the internet.
From January 1, 2019, foreign suppliers of electronic services and foreign intermediaries involved in settlements with Russian taxpayers for electronically supplied services will be obliged to register for paying VAT on these supplies.
There are exemptions from the VAT liability for e-services. For instance, the provision of rights to use software (including electronic games) and databases based on a licensing agreement will be exempt from VAT under this new measure.
The DST is only an interim solution to ensure fair taxation of digital businesses are collected based on the residency of consumers in the home jurisdiction.
The DST shares a number of features with a VAT, by applying “destination” principles to determining the tax base, and in potentially allowing taxpayers to leverage information already collected from their customers (in a VAT context) for determining their location.
France has introduced the bill to levy DST. Businesses must revisit their business models and assess the impact of the tax and compliance cost burden on their models.
Keeping in view the principal purpose of electronic commerce tax, some key planning recommendations for businesses in Russia are:
- Analyze activities to identify supplies which may be classed as electronic services and result in obligations to register for VAT purposes in Russia;
- Assess the feasibility of applying a VAT exemption in relation to certain types of electronic services;
- Assess the possibility and/or necessity of changing the business model, finance model, procedures and/or documents in order to reduce tax risks;
- Consider customizing an enterprise resource planning system to facilitate the collection and processing of information on electronic services, which the tax authority may request in the course of a tax audit;
- Develop a process and record information of users accessing digital services to discharge their tax liabilities;
- There will also be VAT reporting and remittance requirements as well as a requirement to maintain an e-services sales ledger. The reporting requirements are monthly or quarterly. Businesses must develop processes and IT systems to meet the reporting requirements;
- Even though DST is in the nature of a VAT or indirect tax, input used in providing the services may not be available as credit under the present regulations. Businesses should assess the cost of input services, which will become sunk cost, unless there is clarity in the regulation to reclaim credits.
Rajeev Agarwal is Head of Global Tax with Qatar Navigation QPSC. He may be contacted at: firstname.lastname@example.org.
Disclaimer: The content of this article is intended for general information purposes. You should always seek professional advice before acting. No responsibility is taken for any loss because of any action taken or refrained from in consequence of its contents.