Introduction
The OECD's outcome statement on the twopillar solution1 provides for an extension to the standstill on the introduction of new digital services taxes. The extension will last until December 31, 2024, with provision for a further extension to December 31, 2025, if sufficient progress is achieved on the entry into force of the multilateral convention on amount A of pillar 1 (MLC).
The trajectory of pillar 1, however, is far from certain, with many commentators casting doubt on the likelihood of the MLC ever being ratified.2 As a result, taxpayers should expect to encounter DSTs (and similar unilateral tax measures) for some time to come.
The uncertainty generated by the likely proliferation of DSTs is compounded by the uncertainty on the exact status and treatment of DSTs as a matter of international tax law. In particular, the compatibility of DSTs with double taxation treaties (DTTs) is unclear.3
This article examines the potential for the EU tax dispute resolution directive4 to provide an effective and efficient mechanism to challenge the imposition of DSTs (and other similar unilateral tax measures) in an intra-EU context. This article will focus on the procedural steps involved in obtaining a binding determination on whether those measures are compatible with the provisions of relevant Irish DTTs.
DSTs — An Overview
DSTs are generally levied on gross income generated from digital services such as online advertising services, digital interface services, and data transmission services (irrespective of the residency status of the relevant service provider).5 The exact form and application of DSTs can vary from jurisdiction to jurisdiction.
It is likely that jurisdictions that introduce DSTs will be of the view that the deliberate design of the relevant DST is such that it will not constitute a covered tax and is therefore outside the scope of a DTT. However, as noted above,6 the DTT compatibility of DSTs remains uncertain and requires a case-by-case analysis of the characteristics of the relevant measure to determine whether:
- the particular DST is a covered tax under the applicable DTT;7 and
- the imposition of the DST infringes on the nondiscrimination provision in the relevant DTT.
Avenues for Challenging DSTs
In an international context, mutual agreement procedure is the main avenue for taxpayers to resolve instances of taxation in contravention of DTTs. The structure and process applicable to MAP depends on the legal basis for the relevant MAP.
Traditional MAP is available under article 25 of the OECD model tax convention as implemented in the relevant DTT. In addition, in an EU context, MAP is available under the EU arbitration convention8 and, more recently, the directive.9
The Shortcomings of MAP Under DTTs
Notwithstanding the potential technical arguments in relation to the compatibility of a DST with a particular DTT, a key practical question arises: How can the binary question of whether a particular DST infringes on a specific DTT be determined by mutual agreement when the taxing jurisdiction maintains the position that the relevant DST is outside the scope of the relevant DTT?
As noted, the primary mechanism for Irish taxpayers to resolve double tax disputes under a DTT is by way of MAP. Traditionally, for EU taxpayers, the main options for initiating MAP were by way of a DTT or the arbitration convention. However, the availability of MAP under a DTT or the arbitration convention first requires competent authorities to agree that the relevant tax (for example, a DST) comes within the scope of the relevant DTT. It is in this context that the directive is particularly effective because it provides a path to appeal decisions that were denied access to MAP.
Unlocking Stalemate: The Directive's Advantage
The EU's Economic and Financial Affairs Council adopted the directive in 2017, bringing new options for taxpayers seeking to resolve double tax disputes. The directive was designed to build on the existing arbitration convention and the DTTs by "broadening the scope and improving procedures and mechanisms in place without replacing them."10
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Footnotes
1. OECD, "Outcome Statement on the Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy" (July 11, 2023).
2. See, e.g., recent commentary in this publication, including Robert Goulder, "Expectations for 2024: Pillar 1 Finds an Off-Ramp," Tax Notes Int'l, Dec. 18, 2023, p. 1819; and Reuven S. Avi-Yonah, "Do Not Waste Your Time Deciphering the Multilateral Tax Convention," Tax Notes Int'l, Oct. 16, 2023, p. 399.
3. See, e.g., OECD, "Tax Challenges Arising From Digitalisation — Interim Report 2018," at chap. 6 (Mar. 16, 2018).
4. Council Directive (EU) 2017/1852 on tax dispute resolution mechanisms in the European Union.
5. For useful details on the nature and status of various DSTs across the EU, see Daniel Bunn and Elke Asen, "What European Countries Are Doing About Digital Services Taxes," The Tax Foundation (Aug. 9, 2022); Note, Sofía Balladares et al., "Digital Services Taxes," EU Tax Observatory (June 2023); and The National Foreign Trade Council, "International Tax" (last visited Apr. 8, 2024).
6. See OECD/G20, supra note 3.
7. It is worth noting in this context that many of the DTTs that Ireland has in place with other EU jurisdictions (such as France, Italy, and Spain) include language that reflects the equivalent of article 2 of the OECD model convention and in particular the reference to "substantially similar taxes."
8. Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (90/436/EEC).
9. Of course, there may also be options open to a taxpayer to challenge a DST before domestic courts.
10. European Commission, Proposal for a Council Directive on Double Taxation Dispute Resolution Mechanisms in the European Union, COM(2016) 686, at 3.
Originally published by Tax Notes International.
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