After the Spanish Council of Ministers announced its approval on February 18, the Spanish government officially published the text of the bill of tax on certain digital services (the Spanish DST Bill).
While the Spanish government indicated its commitment to keep working on reaching a consensus at the Organization for Economic Co-operation and Development (OECD) and G-20 level, the Spanish DST Bill represents a “letter of intent” towards the implementation of a unilateral DST in Spain if no international consensus is reached by the end of 2020.
The new text of the Spanish DST Bill is very similar to the previous version published in January 2019, the legislative procedure for which was frustrated by the anticipated call for general elections in Spain. In this regard, the changes included in the new Bill reflect the intervening period of time, and in particular the experience gained from the French attempt at implementing its own DST.
What has Changed?
Only a few months have passed since the U.S. Trade Representative concluded that the French DST was unreasonable or discriminatory and burdened or restricted U.S. commerce, and consequently proposed additional duties of up to 100% on certain French products. The U.S. Senate also proposed to double the U.S. tax rates on French companies and citizens located in the U.S. Those threats did not go unnoticed by both the Spanish and French governments, and the latter finally agreed to suspend the DST prepayment collections of 2020 until December 2020, while waiting for the expected (and desired) agreement at the OECD and G-20 level by the end of this year.
The Spanish government is committed not only to reaching an agreement on this topic with OECD countries, where it is playing a driving and leading role, but also to claiming a country’s right to tax sovereignty, as confirmed by María Jesús Montero, the Spanish government spokesperson. In other words, Spain—like France—is definitely willing to apply its own DST if no international agreement is reached by the end of this year.
The Spanish DST is expected to generally accrue on a quarterly basis. However, based on the recent French experience, the new Spanish DST Bill states that the filing of the Spanish DST self-assessments and the corresponding DST liability regarding the second and third quarters of 2020 “will not be required, in any event, before December 20.” With this new commitment, only one Spanish DST payment would be exceptionally (and eventually) due in 2020.
In addition, the Spanish government also updated the public revenue forecast linked to the Spanish DST, based on the expected slowdown of the Spanish economy and the impact that similar measures had in other countries. In particular, the economic impact is now reduced from 1.2 billion euros ($1.34 billion) to 968 million euros per year.
Several stakeholders, both national and international, expressed their strong disagreement with the above Spanish revenue forecast. It is true that the new 968 million euro estimate is exactly the maximum estimation proposed in October 2018 by the Spanish Independent Authority for Fiscal Responsibility (AIReF): perhaps that might be seen as a safe harbor by the government.
Nonetheless, the fact is that the AIReF’s forecast was made on the basis of the initial Spanish DST Bill draft of October 2018, whose wording and scope was different to that of the new Bill. For instance, whereas intra-group transactions were fully taxable under the Spanish Bill Draft of 2018, the new Spanish DST Bill contains an exemption for certain intra-group transactions. Therefore, in our opinion, the AIReF’s maximum estimate should not be taken as read and definitely requires a re-evaluation.
Regardless of the accuracy of the government’s prediction, if we compare the above revenue forecast with those of analogous tax measures unilaterally proposed by other EU jurisdictions—such as France (500 million euros per year), Italy (600 million euros per year) or the U.K. (between 275 million pounds ($352 million) and 440 million pounds per year)—we can see the serious disproportion of the Spanish DST estimate (even if using the newly reduced 968 million euro figure).
What Makes the Spanish DST Different?
In our view, the Spanish DST Bill pretends to have a definitively broader scope than the DSTs proposed by the above-mentioned jurisdictions or even of the Proposal for an EU Directive. The following differences should be highlighted:
- Following the Proposal for an EU Directive, the Spanish DST Bill includes an exemption applicable to intra-group transactions. However, such Spanish exemption only applies when intra-group transactions are carried out between entities belonging to the same group with a stake, direct or indirect, of 100%;
- The Spanish DST Bill will only apply to companies that meet two economic thresholds. Some particularities exist when calculating both economic thresholds. The first one refers to companies whose net turnover exceeds 750 million euros in the prior relevant calendar year. For Spanish DST purposes, the worldwide group net turnover (and not only those revenues related to taxable services, unlike the French DST) should be taken into account. On the other side, it is also required that revenues derived from Spain-located taxable services exceed 3 million euros. For Spanish DST purposes, taxable intra-group transactions (as explained above) should be included when calculating this second threshold. In the author’s view, this very particular way of determining the second economic threshold will definitely imply a significant number of taxpayers being included in the scope of the Spanish DST;
- Unlike the Proposal for an EU Directive, for Spanish DST purposes data transfer services include not only the sale but also the assignment, without consideration, of data.
Despite the above, it is still uncertain whether the above differences (although major) justify per se the significant disproportion of the Spanish DST forecast in comparison with DST measures in other jurisdictions. Perhaps the answer would be “no.” In the end, there are many factors (mainly economic) that should be assessed when carrying out this kind of estimation. In any event, one thing is clear: the broader the scope of a tax implies that it will generate more public revenues.
A Look into the Future
The outlook for the Spanish DST in the near future appears challenging, to say the least.
In the short term, all eyes are on Washington D.C. Based on the recent French DST experience, it is yet to be determined how the U.S. would react. The Spanish government, despite going a step further with its DST, tried to anticipate any (undesired) move from the U.S. administration by maintaining a fluid and communicative relationship with them. For this reason, the government took the “precaution” of requiring a single Spanish DST payment in 2020. What can go wrong then? For the moment, the Madrid-based U.S. Embassy just dropped a slight hint: “If any country [including Spain] unilaterally imposes a tax on digital services, the United States will take all appropriate measures to defend our interests.”
In the meantime, the Spanish DST may be subject to amendments proposed by political parties until final approval by the Spanish parliament. From a technical viewpoint, the new Spanish DST Bill leaves too many “gray” areas pending to be resolved, such as its nature as to direct or indirect tax, or what mechanisms taxpayers will have available in order to avoid or eliminate situations of double or multiple taxation.
In practical terms, the Spanish DST Bill puts more pressure (even more) on OECD members in order to reach an international agreement by the end of this year. All our hopes are on such an international consensus, which would be, in our view, the desired (and perhaps only) long-term solution to really tackle the taxation of the digital economy.
However, the deadline is very challenging and it remains uncertain whether it is feasible to reach such international agreement before the year ends; and, even if so, whether its terms and conditions will be sufficiently concrete for countries, such as Spain, to refrain from going forward with their own DSTs. All things considered, this looks to be a very busy year-end.
Javier Esain is an Associate at the Tax Department of Baker McKenzie Madrid, S.L.P.
The author may be contacted at: email@example.com