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Taxing digital activities - II. 4) Paid digital services

Author: Paul Verhaeghe

  1. This business model can be described as offering or organising services in the Member State (1) as an intermediary or directly (2) through digital interfaces (3) and in exchange of payment (4).

Call centres or web-based paying services can be set up all over the globe without requiring physical contact with clients.  Risks of dislocation of collecting income and parts of the digital service are generally high in this business model.

  1. The combined criteria 1 (offering or organising services in the Member State) & 3 (through digital interfaces) exclude services that are generally not conducted by digital interfaces.

They require in general a meeting in person with the client (doctors, lawyers, architects,..). This exclusion would only apply to the direct providers of these services, and not to digital intermediaries.

  1. The combined criteria 2 (qualifying the intermediary under the same requirements as a direct provider) & 4 (reporting (electronic) payments originating in the Member State) typically serve CFC / BEPS purposes in this business model to create / preserve a profit tax base where it originated.

Delocalization of collecting income can also be addressed by recipient reports to the Member State of electronic payments originating from that Member State. This direct tax law requirement needs at least a Permanent Establishment.

  1. If no presence qualifies as a Permanent Establishment under OECD criteria, this business model could easily continue to elude allocation of profit tax base.

By defining under national law that all national legal requirements for national based providers of such services in the territory of the Member State also apply to the company that collects the income from such services when that company is established in another Member State. These national requirements would then generally lead to a criterion of localisation under OECD rules for Permanent Establishment purposes.

  1. This relates to a business model like Uber. Uber clients in Europe pay to a bank account in the Netherlands belonging to a company incorporated in that country, from that bank account a % is sent back to the national provider of the service. The % that remains is affected through tax engineering to a tax rate of 0 % on royalties in the Netherlands.

This model creates a tax distortion with other suppliers of passenger transport, who are taxed on the full price of the service they provide in the Member State.   Basically the full cost of the service is carried out in the Member State and the profit is split between the provider of the Service and the digital intermediary.

The tax distortion is the loss of corporate income tax on that part of the profit which Uber collects outside the Member State. Through this distortion, they can offer lower prices to the clients than their competitors.

  1. In a ruling of 20 December 2017, the Court of Justice of the European Union qualified the business model of Uber[1] as that of a provider of services (§ 39) :

– the selection of non-professional drivers using their own vehicle, in an application without which (i) those drivers would not be led to provide transport services, and (ii) persons would not use them,

– decisive influence over (i) the maximum fare by means of the eponymous application, that the company receives that amount from the client before paying part of it to the non-professional driver of the vehicle, and (ii) the quality of the vehicles, the drivers and their conduct, which can, in some circumstances, result in their exclusion.

Even if in this case it can be assumed that Uber already had a Permanent Establishment through its Spanish company, this ruling forms a precedent for Member States that wish to zoom into various digital activities where the digital intermediary has no Permanent Establishment, but a substantial role in the collecting of the income and the conditions of the service that takes place on the territory of the Member State.  Under the scope of the same requirements others providers of these services have to comply with, a Permanent base could then be triggered for tax purposes.

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[1] Court of Justice of the European Union, Asociación Profesional Élite Taxi v. Uber Systems Spain SL, 20 December 2017, C-434/15