Spain’s New Digital Services Tax Bill
During its 2018 budget negotiations, the Spanish government conceded to raise public pensions and to decrease the public deficit. To fund this additional cost, the Spanish Minister of Finance proposed a new digital services tax. On Jan. 25, the Spanish government finalized and published the tax bill, which is set for an upcoming parliamentary vote.
The newly approved draft law would tax large companies three percent of their digital turnover, specifically companies that generate worldwide annual revenues of at least 750 million euros and an annual revenue in Spain of at least three million euros.
The revenue subject to the tax is obtained from the sale of online advertising space, the sale of data taken from user-provided information, and digital intermediary activities that facilitate user interaction and promote transactions.
Cabinet spokeswoman Isabel Celaa stated that the tax would bring in estimated annual revenues of 1.2 billion euros to state reserves. However, according to CNBC, “the European Commission, which is responsible for keeping the budgets of EU countries in check, said the tax may not be as lucrative as predicted.” Spain’s fiscal watchdog, Airef, projects the tax to only bring in annual revenues of about 137 million euros. This projected lack of revenue has caused concern that Madrid may fail to lower its gross deficit from 2.7 percent last year to its goal of 1.3 percent this year.
Vice President of the Commission, Valdis Dombrovskis, and Economics Commissioner Pierre Moscovici had already warned the Spanish government that its inability to meet the deficit target may breach the EU fiscal rules. The EU requires its members to keep a budget deficit under “three percent of gross domestic product.” If Spain fails to meet this target, the government could face a fine of up to 0.5 percent of its gross domestic product.
One of the challenges of a digital economy is getting multinational digital companies to chip in to the tax revenues of the countries in which they operate. The tax would prevent companies such as Google, Amazon, and Uber from moving their profits to low-tax states such as Ireland and Luxembourg.
Following Spain’s lead, member states of the Organisation for Economic Co-operation and Development have also recently agreed to move ahead with a plan to reach a global solution to the tax issues caused by a digital economy.
The first goal will be to address the issue of taxing rights, including “how to determine the connection a business has with a given jurisdiction, and the rules that govern how much profit should be allocated to the business conducted there.” The second goal will be to address base erosion and profit shifting, which arises when companies shift profits to countries of low taxation.
During the World Economic Forum this year in Davos, Switzerland, Google vice president Ruth Porat made a statement to support these initiatives.