Digital Services Taxes to be phased out as global tax reform kicks in
26 October 2021
The US, UK, France, Spain, Italy and Austria have announced a compromise agreement under which the domestic Digital Services Taxes of these European countries will be repealed when the OECD's Pillar One proposals (which provide for a new taxing right for market jurisdictions over certain residual profits of the largest multinationals) come into effect in 2023. In return, the US has agreed to terminate its proposed retaliatory trade tariffs.
Transitional rules will provide for carry-forward tax credits to be available to companies to the extent that liability to these DSTs during a transitional period is more than the amount payable by them under Pillar One in the first year of its application.
It was always part of the global tax reform agreement that existing unilateral measures aimed at addressing the tax challenges of the digital economy would be withdrawn, and it was agreed that no new ones could be imposed from 8 October 2021. However, the US was keen that current DSTs be repealed immediately (US digital companies being particularly affected) whereas the countries which had introduced these measures preferred to wait until the new rules actually come into effect.
The compromise reached allows for the domestic DSTs of the UK, Austria, France, Italy and Spain to stay in place until Pillar One has force, but with a tax credit for excess DST which ensures that affected companies do not pay more tax under DSTs that they would have done under Pillar One, had that been implemented earlier.
The excess DST will be calculated as being the amount by which the DST accruing in the transitional period (i.e. between 1 January 2022 and the earlier of the date the Pillar One multilateral convention comes into force or 31 December 2023) exceeds the amount equivalent to the tax due under Pillar One in its first year of application to that company (pro rated to ensure the amounts are proportional to the length of the transitional period). This amount will be creditable against future taxes due in respect of Amount A of Pillar One in that jurisdiction.
This compromise agreement has been welcomed as, not only does it avoid the punitive trade tariffs which the US had threatened to impose in retaliation to the DSTs, but it enables the revenue from these DSTs to be retained by the jurisdictions until Pillar One is in place.
As the DST credit can only be set off against future Pillar One liabilities, this credit system is only of value to the (relatively small number of) MNEs which meet the €20bn turnover and 10% profitability thresholds to fall within the scope of Pillar One. However, analysis by TaxWatch in the UK, for example, indicates that additional Pillar One tax payable by the tech giants is expected to be substantially less than that levied under the UK DST and so these companies will also be very pleased by this latest announcement.
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