August 3, 2018

Austria rekindles the EU Digital Tax

Many political commentators and tax experts have written off the pending European Union’s Digital Service Tax (DST) as a political dream that will never get the unanimous backing of all 28 EU member states needed for the bill to pass.

After all, it is was only recently that three Nordic countries – Denmark, Finland and Sweden – delivered an unequivocal rejection of the DST that is targeted at the big tech companies such as Google, Facebook, Ebay, Uber and Airbnb. And previous to the that, the new German coalition government – staring at hefty U.S. tariffs on the nation’s car exports – began a slow retreat from its support of the plan.

But while much of Europe began its Summer retreat to the sea, sand and sunshine, the sails of the seemingly adrift and moribund DST have received a blast of fresh air. The first zephyr came in the form of the Meseberg Declaration put forth by France and Germany on June 19 as a way to revitalize the two nation’s role as the motorof Europe. Among the commitment’s made by French President Emmanuel Macron and German Chancellor Angela Merkel was one to “reach an agreement on a fair digital taxation by the end of 2018”.

A few weeks later, Austria, which has been a supporter of the DST from the start, took over the rotating EU presidency. Austria promptly made it clear it would put the DST on the front burner and dedicate its six months at the helm in the Council of Economic and Financial Affairs to forging a deal – Nordic country opposition or not.

Moreover, the Austrians have made the DST a key agenda item when EU finance ministers meet Sept. 7 and 8 in Vienna for their informal bi-annual meeting.

To begin such an ambitious crusade, Österreich decided that, based on earlier negotiations held during the Bulgarian EU presidency, it needed to address a number of key technical issues. As a result, it issued a “discussion” paper addressing issues such as taxable persons, revenues, rates, place of apportionment, collection and a sunset clause.

First,the Austrians realized that if any progress is to be made it needed to come up with a precise definition of targeted online advertising. Adding legal clarity to the issue, it noted in its discussion paper, was crucial to finding consensus on the scope of the DST.

As a result, Austria distributed on July 9 all EU member states a four-page document titled “a definition of targeted advertising’”. In the aforementioned, 15-page discussion paper, the Austrians made it clear why such a precise definition was necessary.

The Commission’s proposal does not define targeted advertising”, the document says. “As advertising is a central element of the scope several member states asked for a precise definition”.

The precept to the Austrian presidency definition was to define two characteristics:

individual targeting as opposed to targeting of groups of individuals;

*targeting based on data collected from users.

Based on that, one could say that `targeted advertising” for the purposes of the DST Directive means `advertising targeted at individual users of a digital interface based on data collected on them”, the paper says. 

The Austrian document adds that targeting may have different levels of intensity, meaning that the amount of information about users that is taken in account for the purposes of displaying publicity will vary depending on the choice of the supplier. For instance, data about users may include many various criteria: specific location (city, country), age, gender, language spoken, individual preferences or interests (e.g. words looked for in search engines) and others.

The document says that some businesses may target their advertisements using many specific criteria while others may use less. It cited as an example: a specific advertisement of an Italian wine sold in Italy appearing only to users located in Italy (IP address of the device used to access an interface located in Italy).

The fact that less criteria (maybe only one criterion) is used for the purposes of targeting should not mean that such an advertisement is not targeted because data about the receiver of the advertisement has been taken into account”,  the Austrian paper says. It added that this definition is based on the one for profiling as outlined in the EU General Data Protection Regulation.

Most important, the Austrian paper notes that online advertising such as banner ads that are not based on user data but are placed on a ”no-matter-whom access” to a web site would not be considered targeted advertising and therefore not subject to the DST.

Distinguishing between targeted and non-targeted advertising based on the description above would have to be carried out on a case-by-case basis”, the Austrian paper says.

Think about that for a minute or two. Tax authorities in all EU member states will have to effectively monitor all online advertisements displayed in their country even if they involve a seller and a buyer based in another EU country. Or in a foreign country. No wonder the scopeissue is considered one of the most politically difficult.

That said, there are other difficult technical issues. This became clear at a July 24 round of technical discussions among EU tax experts held in Brussels and chaired by the new Austrian presidency. Revenue thresholds, the one-stop-shop collection system, user ID proxies and rates, which is considered the second to the scope issue as the most difficult to be resolved, were all subject of varying viewpoints.

Over the next month, I will explore some of these issues in further detail as a preview to the upcoming EU finance minister meeting in Vienna. Okay. Not exactly beach leisure reading material, but for those with a lot at stake when it comes to the DST, these details are vital.