Spanish digital services tax targets big tech companies

Spain’s digital services tax (DST) is slated to enter into force in January 2019, despite the criticism and concerns of multinational technology companies, write Rafael Calvo and Juan Camilo Sánchez of Garrigues, Taxand Spain.

Following the path of the European Commission, the Spanish
government has recently filed a preliminary bill to create the
DST, an indirect tax on digital services where there is an
essential contribution by the users to the value creation
process of the company and where those user contributions are
monetised by the companies. In accordance with the
government’s forecast, the DST would collect
€1.2 billion ($1.4 billion) in FY2019.

The tax rate would be 3% and the taxpayers would be the
multinational groups with net revenues of more than €750
million worldwide and over €3 million in Spain. This
measure will affect large multinational technology companies
providing the following digital services:

  • The placing on a digital interface of advertising
    targeted at users of that interface (online advertising

  • The making available of multi-sided digital interfaces to
    users which allow these to find other customers and to
    interact with them, or even facilitate the provision of
    underlying supplies of goods or services directly between
    those users (online intermediary services); and

  • The transmission of data collected from users on digital
    interfaces (data transmission services).

On the contrary, the DST should not affect entities
providing underlying supplies of goods or services that take
place between users within an online intermediary service. It
should also not apply to the sales of goods or services
contracted online via the website of the supplier of those
goods or services (e-commerce retail activities), where the
supplier does not act as intermediary. This is because the
value creation for the retailer lies with the goods or services
provided and the digital interface is only used as a means of

Spain’s DST is based on one of the two
legislative proposals published by the European Commission in
March 2018. The Commission’s initiatives are:

  • A long-term solution, which consists of modifying the
    traditional definition of permanent establishment (PE) to
    create a digital PE, which would exist when a multinational
    group has a significant digital presence in a member state.
    It would apply when the company provides digital services
    through a digital interface and meets certain conditions
    related to number of users, contracts and revenues; and

  • An interim solution, which is almost identical to the one
    being promoted now by the Spanish government.

As expressly mentioned by the Spanish government, the fact
that no practical solutions have been adopted in this respect
since international debates on the subject began, as well as
growing social pressure, tax justice and sustainability of the
tax system, mean it is necessary to follow the path started by
other countries and adopt a unilateral solution. However, the
government said the rules on its DST will be adapted once a
solution is adopted at European level. Therefore, the DST
should be considered in principle as a temporary measure that
may be modified as soon as other measures are approved at a
European level.

As expected, the European Commission and the Spanish
government have received a great deal of criticism after
publishing these initiatives, including the following:

  • The Commission and the Spanish government assume that in
    the covered digital activities, the “value” of the service is
    created by the users, which are the ones who provide the data
    used by these companies to supply the digital services. On
    the other hand, the multinational technology companies
    maintain that the “value” of the service mainly resides in
    the industrial and intellectual property of the platform or
    application, or in the know-how, given that there would be no
    point in having the users’ data without knowing
    how to process them.

  • These measures could generate double taxation or excess
    of taxation given that the DST would be levied on the total
    gross income (without the possibility of deducting expenses)
    from a business, without considering whether the group has
    had losses or whether that income has been taxed in other
    jurisdictions; and

  • The DST has been designed as an indirect tax, compatible
    with VAT, with the main aim of falling outside the scope of
    tax treaties, which could raise legal concerns.

Despite the foregoing, if finally approved, the Spanish DST
will presumably enter into force in January 2019.

Rafael CalvoJuan Camilo Sánchez

Rafael Calvo ([email protected])
and Juan Camilo Sánchez ([email protected])
Garrigues, Taxand Spain

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