Do the joint thresholds of 750 million euros in annual global sales and another at 50 million euros in European Union-based sales for when digital companies would be hit with the EU temporary 3 percent EU digital service tax violate sacred tax neutrality principles? A number of EU member states insist they do.

 So much so that EU presidency holder Bulgaria has proposed for the elimination of the 750 million Euro threshold in global sales and just limit the coverage to companies with 50 million euros in EU sales. The change would likely boost the number of companies that would be required to pay the tax. The European Commission estimates the number of companies that would have to pay the DST under the currently proposed joint thresholds is between 120 and 150. The number with just the one threshold would put hundreds more on the eligibility list.

Following a host of meetings among the 28 EU member state tax experts on the temporary DST the Bulgarian presidency has proposed another important change: a reduction in the scope of the DST. This involves eliminating “the transmission of data collected about users and generated from users’ activities on digital interfaces” which is one of three activities originally proposed by the European Commission. The change was suggested over concerns of a “cascading effect” when it comes to the sale of raw user data multiple times.

The elimination of the 750 million annual turnover threshold and leaving just the 50 million EU sales turnover in the DST proposal is crucial to a host of EU member states because otherwise they insist it will lead to some very unfair tax bills. For example, under the joint thresholds approach a digital company with a 740 million Euro turnover but with a eligible EU digital services above 50 million euros would not have to pay the DST. On the other hand, a company with 760 billion euros annual turnover but digital service revenues just above the 50 million euros threshold would have to pay the 3 percent levy.

According to various EU tax experts involved in the DST negotiations, this unequal treatment would violate fundamental principal of tax neutrality as confirmed by the European Court of Justice.

Just as controversial as revising the DST monetary thresholds are plans afoot to revise the DST scope. While the Bulgarian presidency has mooted a revision by eliminating the DST on user generated raw data, there are major divisions among EU member states with some insisting on even further scope narrowing, including eliminating intermediates that use “multi-sided” online platforms for “facilitating” the “provision” of goods and services. Other countries insist scope expansion should be considered. 

Those in favor of limiting the scope, including dropping intermediates, insist that while it might hit a few large companies such as Uber, Airbnb and Ebay, there are as many as 300,000 small EU businesses that will ultimately end up indirectly paying the levy. If the scope for intermediates is not eliminated for them, the 3 percent DST should at least be reduced.

Another contingent led by Estonia, which held the EU rotating presidency in the second half of 2017 and led the Council of Minister in drafting recommendations for the Commission proposal, insists that if anything the scope should be expanded. As a result, it will submit a proposal change to Austria when it takes over the rotating EU presidency on July 1.

The proposal will insist that the sale of raw user data and the sale of user data-based advertising service are “dangerously” too close to each other to allow further distortions through taxes and therefore the scope must at a minimum remain as proposed. This is especially true, according to Estonia, because temporary DST scope is line with the long-term pending EU proposal for a new virtual permanent establishment as way to tax digital companies where value is created.

Echoing the position of a number of EU member states Estonia will warn that any “watering down” of the DST proposal would disappoint the markets and be useless to governments.