When the European Union agreed to launch the EU single market in 1992, one of the most politically difficult political and economic issues it faced revolved around establishing a harmonised Value Added Tax regime that did not create competitive distortions.

But the agreement on the EU VAT system in the early 1990s was a political, patchwork compromise supposedto be a short-term solution, where member states were allowed to have varying rates and a long list of reduced or zero rate exemptions. 25 years later such the sometimes-unfair system is still in place.

The VAT story is a very important benchmark for many when it comes to the current EU Digital Service Tax (DST) Directive negotiations, which will move into overdrive in September as EU presidency holder Austria pushes hard to get an agreement by the end of 2018. Like the VAT regime, the DST is supposed to be temporary. As soon as OECD members finalize the terms of digital taxation as part of the BEPS process and an EU “comprehensive solution” is agreed then – presto – the DST is supposed to expire. 

However, history tells us that, once governments agree on a taxable source of revenue, turning off the tap can be as difficult. That is one reason groups such as BusinessEurope, representing more than 10,000 of the largest businesses in the EU, oppose the DST.       

In recognition of the 25-year-old “temporary” VAT experience and waryof repeating it, some EU member states are pushing for a specific “sunset” clauseto ensure that the DST does not become another addictive fountain of milk and honey funding.   

To accommodate these demands, the EU presidency holder Austria, in its chairmanship role in the Council of Economic and Financial Affairs, has offered up two “sunset clause” options during negotiations that took place in July and will resume when the summer recess concludes at the end of the month. One option involves adding specific language to the long-term EU digital tax legislation, which was also proposed in March and is designed to establish the “comprehensive solution”, involving a “virtual” permanent establishment approach for corporate taxation in the digital economy.

Another option put forth by Austria calls for a “specific date” in the text of the DST directive. “The directive shall be applicable until the comprehensive solution will be implemented or until Dec. 31 [xx] whichever is earlier,” according to a draft text. Should the expiration date arrive before the comprehensive long-term digital taxation directive has been agreed, then the plan calls for the European Commission to propose for an extension.“Member states would be free to decide to let it expire or prolong the DST”, the text says.

However, for some member states even a “sunset clause” is not enough. They want what some refer to as a “get-out-of-jail” clause in the legislation. It should stipulate that any company that falls within the threshold and scope of the DST and is being assessed the 3 percent levy but agrees to pay tax where the profits are earned from value creation, it would be granted an exemption.

“After all”, said one EU member state diplomat after a recent Council of Minister negotiating system, “that is the whole objective of this exercise”.