Only four days after the Organization for Economic Co-operation and Development’s Inclusive Framework made public—and clear— that an international consensus-based solution within the BEPS Action 1 framework will finally not be reached in 2020, the Spanish DST Act was published in the Spanish Official Gazette. Contemplating a three-month vacatio legis period, the Spanish DST will enter into force on January 16, 2021.
Features that Deserve Close Attention
The Spanish DST Act generally follows the Proposal for an EU DST Directive made by the European Commission in March 2018 (the EC Proposal).
However, as anticipated in our previous insight on this topic, the Spanish DST does have certain elements that make it unique.
Major differences exist, for instance, in defining the thresholds of the covered taxpayers and the in-scope digital services. For instance, the Spanish DST contemplates a “local digital footprint” threshold of “only” 3 million euros ($3.5 million)—which seems to be significantly low, when compared with the 25 million euros, 5.5 million euros or 25 million pounds ($33 million) thresholds implemented or proposed in France, Italy or the U.K., respectively. Assignments of data and intra-group transactions performed between companies that are not fully owned are also included as in-scope digital services.
Attention should also be drawn to the absence in the new text of the Spanish DST Act of certain recommendations or provisions that were considered under the EC Proposal or analogous DST proposals drafted by other countries. This is the case, for instance, for safe harbor clauses intended to apply to loss-making or low-margin companies, or specific double tax relief rules. The Spanish DST contemplates none of these rules. Moreover, the Spanish government has highlighted that the Spanish DST is conceived as a transitional measure until the entry into force of the new legislation aimed at incorporating the internationally agreed solution. The first draft bill of the Spanish DST of 2018 included such a commitment. Nonetheless, such a sunset clause is not included in the new text of the final version of the Spanish DST Act but in its statement of purpose.
The estimation of annual public revenues to be derived from the Spanish DST has recently been confirmed by the Spanish government as 968 million euros for 2021 (as per the Draft of Budget General Act for 2021 published on October 28, 2020). One should bear in mind that the above Spanish estimation represents almost a 20% of the annual revenue estimationmade for all 29 EU member states under the EC Proposal. The 968 million euros estimation recently confirmed remains unchanged from the estimation made public in February 2020 by the Spanish government.
Little Time Left and Important Challenges Still on the Table
Although the Spanish DST will apply as of Q1 2021, there are still issues for taxpayers concerning its implementation.
Currently, there are still several uncertainties relating to key issues of the new tax, such as how its taxable base should be calculated or which geo-localization instrument(s) taxpayers should use to consider whether a specific in-scope digital service has been carried out in Spanish territory. The latter is particularly relevant, since the Spanish DST Act includes a specific penalty regime that applies precisely if taxpayers fail to establish those instruments or mechanisms. In particular, penalties of up to 400,000 euros per year could be imposed for taxpayers that fail to comply with this obligation. In this regard, it is expected that the future Spanish DST Regulations will consider “physical geo-localization systems” as valid systems for this purpose.
The administrative formalities that will have to be complied with are also expected to be particularly burdensome for taxpayers. In this regard, Spanish DST taxpayers should register with the Spanish tax authorities and, in certain cases, also appoint a representative for DST purposes. Unlike some DST proposals drafted by other countries, the Spanish DST does not contemplate a grouping election possibility, which would have allowed a specific entity of the group to fulfil the relevant group’s Spanish DST liabilities. According to the Spanish DST Act, if the group exceeds the relevant thresholds, every entity in the group will be deemed a taxpayer, to the extent that it generates taxable revenue.
Other relevant information, such as how the Spanish DST will be submitted and paid, is also awaiting confirmation. Keeping a registry book for DST purposes is also expected to be required, although its specific content is not currently known but is expected to be developed in future Spanish DST Regulations.
The Spanish DST requires attention from taxpayers, given that it will be applicable in a couple of months. Thus, it is definitely time for companies to get ready for this new tax and dedicate some time to reviewing how it may affect their businesses.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Javier Esain is a Senior Associate at the Tax Department of Baker McKenzie Madrid, S.L.P.
The author may be contacted at: firstname.lastname@example.org
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any other person or organization.