In light of the recent approval and entry into force of the Digital Services Tax Act and its implementing regulations, affected companies must file their first tax return during the month of July 2021.
In this update we will briefly outline the international tax situation and the practical application of this new tax in Spain.
- The international situation
The current rules on international taxation (principally the OECD double taxation conventions) are mainly based on physical presence and were not designed to address business models based primarily on intangible assets, data, and knowledge. They do not take into account business models where companies can provide digital services in a country where they have no physical presence, causing a disconnect between the place where value is created and where companies are taxed. In other words, the current rules are not appropriate to tax profits generated by the digitalisation of the economy, when these profits are closely tied to value created by data and users.
There is international consensus that the best strategy to address this problem would be to find a solution at a global level (i.e. within the OECD). Such a solution could comprise a review of the (digital) permanent establishment concept, providing for the part of a company’s profit that corresponds to the value derived from data and user contributions to be allocated to the country from which the data originates or in which the data and the users are located. However, given that it could be years before these measures, which require agreement at an international and multilateral level, are adopted and implemented, several countries have begun to take unilateral measures to try and address the problem. Agreement at the global level and unilateral measures are both legitimate solutions contemplated in the G20/OECD Interim Report on the tax challenges arising from digitalisation. Accordingly, last October saw the approval and publication in the Spanish Official State Gazette of the Digital Services Act, in line with the European Commission’s proposal.
Therefore, the regulations governing of the new Digital Services Tax are mainly based on those proposed by the European Commission and are intended as a temporary measure until the entry into force of the EU Council Directive laying down rules relating to the taxation of companies with a digital presence.
- Practical application of the new Digital Services Tax
The main features of the Digital Services Tax are as follows:
What is being taxed?
Supplies of digital services carried out in Spain.
What is meant by digital services?
The following three services: (i) online advertising services, (ii) online intermediary services, and (iii) data transfer services.
What services are not affected by this tax?
Among others, (i) online sales of goods or services through the supplier’s web page, where the supplier does not act as an intermediary (e.g. via the supplier’s own e-commerce site), (ii) supplies of goods or underlying services taking place between users within the framework of an online intermediary service; or (iii) supplies of regulated financial services by regulated financial institutions.
What companies are affected by this tax?
Companies with total turnover exceeding EUR 750 million during the previous calendar year and revenues from digital services in Spain that exceed EUR 3 million. These companies are deemed to have a “significant digital footprint” in Spain.
When does the supply take place in Spain?
A nexus exists when users of digital services are located in Spain, which is mainly determined by their IP address.
What is the applicable tax rate?
3% of revenue from digital services obtained in Spain.
How is the tax collected?
The Digital Services Tax is payable quarterly. Form 490 should be filed during the month following the end of the quarter.
The self-assessment return for Q1 2021 should be filed and paid in the window corresponding to Q2 2021, from 1 July to 2 August 2021. This does not affect the window for direct debit payment of tax liabilities for Q1 and Q2 2021, open from 1 to 28 July 2021.
How should companies prepare?
Taxable companies will be required to keep and make the following records available to the Spanish tax authorities:
- Worldwide income generated by the taxable event (online intermediary services, online advertising services and, or data transfer);
- Number of times the advertisement appears on devices in Spain and outside Spain (advertising services);
- Number of users whose devices are located in Spain and outside Spain at the time of the transaction (intermediary services);
- Number of accounts opened by users located in Spain and outside Spain (intermediary services with no underlying transaction); and
- Number of users relating to the transferred data whose devices were located in Spain and outside Spain (data transfer)
In order to comply, affected companies should set up internal systems or mechanisms that allow them to locate users’ devices in Spain, and also prepare their systems to generate these records and store them in a compatible format for submission to the tax authorities.
Is there any documentation to prepare?
In addition to the above, companies must also provide the tax authorities with a memorandum describing the processes, methods, algorithms, and technologies used to:
- Analyse the liability of digital services to the new tax;
- Identify the place of supply of each type of service; and
- Calculate the income associated with each taxable event.
 Negotiations are currently ongoing over the OECD’s Pillar One and Two blueprints, which aim to (i) reformulate the criteria regarding nexus and profit allocation, and (ii) establish a global minimum tax. Just a few days ago, the US president endorsed the implementation of a global minimum tax, a move that is a boost to the international proposal.