“A DST is a new tax imposed on the revenues or profits of nonresident firms that provide digital advertising, services, or content to a local user base. This definition excludes VAT withholding taxes or digital nexus rules.”
In this entry, we want to take a bit of a deeper dive into this proposed definition, by way of defending our proposed definition. Any proper law journal article starts with a defined term or two, often accompanied by a lengthy footnote in explanation. The area of DSTs undoubtedly deserves no less. Since DSTs are unilateral measures with no playbook, defining what constitutes a DST and what does not is a matter of some debate.
We have investigated the available reports to date and analyzed the taxes that have been described by journalists or policymakers as DSTs, and we find that many seem to describe virtually any tax that appears to be aimed at either digital firms or digital services as DSTs. Even professional tax advisers like KPMG mix and alter their terms without warning. For example in this report, KPMG introduces a chart to depict “Direct Taxes (e.g., DST/WHT/Digital PE)” but then also includes the undefined acronym “DAT,” which we assume to stand for “digital advertising tax” (we can only assume this because there is no list of defined terms in the report). Yet DSTs include digital advertising within their scope, and even though there seems to be a qualitative difference between a DST, a WHT (withholding tax) and a Digital PE, KPMG offers little by way of explanation.
Similarly, recent news articles, journals, and other media outlets have defined DSTs alternatively as turnover taxes on gross income; turnover taxes applied to “the revenue generated from taxable activities regardless of costs incurred by a firm”; taxes “imposed on certain cross-border digital earnings based on consumer location”; gross revenue taxes that include “revenues derived from a specific set of digital good or services, or based on the number of digital users within a country”; or as “interim system of a tax on revenues from certain digital services by tech companies of a certain size”. Some define DSTs to include a range of taxes on firms from gross revenue taxes to turnover taxes to interim taxes on specified revenue streams. There is also a lack of clarity on whether DSTs are based on specific determinants (such as revenues generated from certain goods and services, consumer location, number of users in a jurisdiction, size of tech companies), or applied flexibly with some sort of combination of these factors. A loosely defined term may give a false impression that DST has a much broader tax base and purpose than it actually might have.
The broad umbrella of “digital taxes” could include very different types of taxes imposed on services provided by tech companies including DSTs, value-added and other forms of consumption and excise taxes, revised permanent establishment (PE) rules, and gross-based withholding taxes. Using these terms interchangeably often results in mislabelling taxes and causing further confusion to an already complex international tax vocabulary. For example:
- The United States Trade Representative (USTR) investigation into 10 jurisdictions, together with many news articles, describes India’s equalization levy as DSTs, as we did in our infographic (see here and here) and some reporters have called it the “Indian digital tax”. There is some debate about whether this levy should be considered a DST as compared to other regimes, such as the French DST, which prompted the first USTR investigation.
- Indonesia’s Digital PE and e-Transaction tax has been described as a DST (see here and here) as well as a Google tax, and since this tax is included in the USTR investigation into DSTs, we included it as such in our infographic. But this tax is not clearly a DST as we have described it.
- The extension of India’s VAT withholding obligations on digital services furnished by nonresident firms has also been described as a DST, but we excluded it as we did all other VAT withholding obligations. Similarly Poland’s tax on online streaming services has been described as a surcharge, a contribution to the country’s film industry, a DST, a digital tax, and a Netflix tax. We think it is a withholding tax obligation like the others. We would say the same about Quebec’s so-called Netflix tax (also described as such here) as well as any sub-national sales tax withholding obligation imposed following the recent U.S. Supreme Court decision in the Wayfair case. The KPMG report linked above canvasses a number of national regimes under the category of indirect taxes, but it is inconsistent as to subnational rules–it includes a reference to Quebec’s regime but not that of South Dakota. We expect these kinds of rules to proliferate because their role is clearly to enforce existing internal consumption taxes regardless of the residence of the service provider and regardless of the nature of the service, but they are not, in our view, DSTs.
- Austria’s DST has alternatively been described as a digital advertising tax (DAT). Similarly, Hungary’s tax on digital advertising revenue is reported as a DST and as a DAT. Both seem to us to be includible in the category of DSTs, so we have included them as such in our infographic.
- Belgium’s DST is defined as DST/Digital PE. It seems to us to look very much like the French DST, which is consistently referred to as such.
These examples highlight some ambiguities arising in the discourse surrounding the so-called “digital tax war”. Distinguishing more clearly between DSTs and other types of tax rules applicable to digital firms and services could provide some clarity. Understanding the conversation as it evolves will require attention to the way in which each jurisdiction is defining and characterizing their DSTs, to make sure we are all discussing the same thing. To that end, for now we will stick by our proposed definition for this DT Log: A DST is a new tax imposed on the revenues or profits of nonresident firms that provide digital advertising, services, or content to a local user base.
As such, a DST is distinguished from a withholding obligation associated with a value added tax on the provision of services, and it is also distinguished from a redefinition of nexus rules to broaden the definition of permanent establishment for the purpose of imposing existing local (net) income taxes on foreign firms. In the next entry to the Digital Tax Log, we will take a closer look at that latter category by describing the significant economic presence regimes that we have located to date and highlighting some of their main features.
Source – CTF