Spanish government approves digital services tax targeting large multinationals

By Dr. Patricia Lampreave, Professor, Instituto de Estudios Busatiles, Madrid

The Spanish government today approved a bill for a digital service tax for discussion by the parliament.

The Spanish government is engaged in international discussions to address the tax challenges of the digital economy but the government also maintains that the new tax is needed because the current international income tax regime applicable to multinational companies results in under taxation. The reality is that the tax must be approved now, before the budget is approved, due to the need for increased revenues to fund increased public spending already adopted by the government for 2020.

The Spanish government has a majority consensus on the new tax, and it is, therefore, very likely to pass, though amendments may be incorporated before the approval of the final version.

Also, for the moment, it is unclear what the effective date of the controversial new tax obligation will be. If the OECD reaches a deal by the end of 2020, then Spain´s unilateral tax would not be applied at all, but If there is no multilateral agreement by then, Spain will collect the tax at the end of the year. The question is if the payment is delayed, the Spanish government will need to find other revenue for funding public spending.  

Spain’s digital tax

Spain’s digital services tax is largely based on a similar proposal floated by the EU in March 2018 which has not been yet approved by the Member States. The new tax is an indirect tax, compatible with VAT. The tax rate applied will be 3% of gross revenues (without deduction of any expenses) from digital services.

The digital service tax is focused on the services rendered, regardless of the providers’ feature. Like the EU proposal, Spain’s digital services tax does not tax all digital services—only those in which the user’s role in value creation is considered essential.

The revenues subject to Spain’s digital services tax are those from three main types of services: selling online advertising space, digital intermediary activities, and the sale of data generated from user-provided information.

Online advertisement

Online advertisement is within the scope of the Spanish digital services tax when the user´s device on which the advertising appears is located in Spain.

In line with the EU proposal, the bill establishes that a digital interface means any software, including a website or a part thereof and applications, including mobile applications, that is accessible by users.

Online intermediation

Digital intermediary activities subject to Spain’s digital services tax are those that allow users to interact with other users and which can facilitate the sale of goods and services between them.

Such activities would fall under the Spanish digital services tax when the underlying transaction takes place through a digital interface using a device located in Spain or the user’s account is opened with a device located in Spain.

Data transfer

Data transfer is subject to the Spanish digital services tax when the data transferred is generated by a user through a digital interface using a device located in Spain

As mentioned, the nexus for attributing taxation rights to Spain is based on the location of the user’s device. A controversial aspect of the new law is that it establishes a legal presumption that the location of any digital device corresponds to IP address. In other words, if the IP address is located in Spain, it is assumed the digital service is provided from Spain unless other proof is provided. In line with the EU proposal, Spain’s digital services tax lists a series of cases out of the scope of the digital services tax and, therefore, not subject to tax. The Spanish digital services tax is expressly intended not to apply to certain activities, including financial intermediation and crowdfunding.

A controversial aspect of the new law is that it establishes a legal presumption that the location of any digital device corresponds to IP address.

Intercompany transactions

It is relevant to mention that, unlike the EU proposal, inter-company transactions, cross-border transactions, and domestic transactions are subject to tax.

The tax applies to both resident and non-resident companies (inside and outside the EU) whose revenues exceed certain thresholds. To protect small and medium-sized businesses and start-ups, taxpayers that are subject to Spain’s digital services tax are limited to those that have more than 750 million euros of total annual worldwide revenue and 3 million euros total of annual revenue from digital activities in Spain during the relevant financial year.

The bill establishes compliance obligations. Among others, companies must file periodic returns of information requested by the tax authorities relating to the computation of the digital service tax or must maintain all documents to support service transactions carried out in Spain. If the company is not established in Spain, it must appoint a tax representative to pay the DST in its place The bill also establishes penalties for noncompliance.

On the legal level, the digital services tax raises many questions. I consider this unilateral solution as inappropriate and likely to draw retaliation from third countries.

A unilateral digital services tax could result in double taxation, particularly when charged on revenues which are already subject to corporate income tax in a particular jurisdiction.

It is unclear if the proposed digital services tax is a direct, hybrid, or indirect tax and, therefore, whether it conforms with national laws and double tax conventions.

The proposed digital services tax has been designed with large and highly profitable companies in mind, but in practice, the digital services tax would be passed on to consumers. Therefore, the tax will not meet the aim for which it was created.

Also, it has been argued that the fact that smaller companies will not pay the digital services tax may be regarded as having received an unlawful aid. Despite there have been cases in which the  European Commission has considered as unlawful certain taxes for exempting small companies, in the case of the Spanish digital services tax, the measure could be justified by the logic of the system, therefore I don´t believe we have a case of state aid with the Spanish digital services tax.