12922/18 1 JUR LIMITE EN

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1 Council of the European Union Brussels, 8 October 2018 (OR. en) Interinstitutional File: 2018/0073(CNS) 12922/18 LIMITE OPINION OF THE LEGAL SERVICE 1 Subject: JUR 484 ECOFIN 891 DIGIT 195 IA 303 Proposal for a COUNCIL DIRECTIVE on the common system of a digital services tax on revenues resulting from the provision of certain digital services Legal basis Principle of proportionality I. INTRODUCTION 1. As a response to the European Council conclusions of 19 October underlining the need for an effective and fair taxation system fit for the digital era as well as to the Council (ECOFIN) conclusions of 5 December 2017 on Responding to the challenges of taxation of profits of the digital economy 3, the Commission presented on 21 March 2018 the Digital Taxation Package, which consists of the following: 1 This document contains legal advice protected under Article 4(2) of Regulation (EC) No 1049/2001 of the European Parliament and of the Council of 30 May 2001 regarding public access to European Parliament, Council and Commission documents, and not released by the Council of the European Union to the public. The Council reserves all its rights in law as regards any unauthorised publication. 2 Doc. EUCO 14/17, point Doc / /18 1

2 i) a proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence ("SDP") 4 ; ii) a Commission Recommendation relating to the corporate taxation of a significant digital presence; 5 iii) a proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services ("DST"); 6 and iv) a Communication Time to establish a modern, fair and efficient taxation standard for the digital economy The SDP proposal is based on Article 115 of the Treaty on the Functioning of the European Union (TFEU). The SDP proposal lays down rules extending the concept of a permanent establishment - as it applies for the purposes of corporate tax in each Member State - so as to include a significant digital presence through which a business is wholly or partly carried on; it also establishes certain principles for attributing profits to or in respect of a significant digital presence for corporate tax purposes. 8 This proposal is referred to as the comprehensive solution for addressing the challenges of the digital economy taxation and it will take time to be adopted and implemented as it is dependent on global developments within the Organisation for Economic Cooperation and Development (OECD) and at G20 level 9. 4 Doc 7419/18. 5 Doc 7421/18. 6 Doc 7420/18. 7 Doc 7418/18. 8 Article 1 of SDP proposal. 9 See further explanatory memorandum of the DST proposal, page /18 2

3 3. While waiting for the comprehensive solution, the DST proposal is presented as an interim measure based on Article 113 TFEU. It provides for the taxation of gross revenues resulting from the provision of certain digital services relying strongly on user contribution, namely advertising, intermediation and data transmission services, at a fixed rate of 3% of the gross revenue 10. According to the DST proposal, taxable persons are entities exceeding both a worldwide threshold of a total amount of revenues of EUR and an EU-wide threshold of a total amount of revenues of EUR The Working Party on Tax Questions (WPTQ) met on 11 April and 2 May 2018 to discuss the SDP and DST proposals. Following the doubts expressed by some delegations with regard to the nature of DST as an indirect tax, the advice of the Council Legal Service was sought at the WPTQ meeting of 14 May on the appropriateness of Article 113 TFEU as the legal basis of the DST proposal and, additionally, on compliance with the principle of proportionality. 5. The present opinion seeks to respond to those questions. 6. It should be stressed at the outset that the assessment of the nature of DST as an indirect or direct tax in this opinion serves the sole purpose of determining the appropriate legal basis for the proposal in EU law. No automatic consequences may be derived from it as regards the classification of DST as a direct or indirect tax, or under any other taxonomy, by national law for domestic purposes, as long as the objective of harmonisation pursued by the proposed Directive is not put at risk. No automatic consequence may be derived from it either as regards the question whether DST falls within the scope of existing international double tax treaties concluded by the Member States. This question ought to be addressed on a case by case basis, regarding the specific characteristics of each double tax treaty and of the applicable rules of international law, as articulated in particular in the framework of the OECD. 10 Article 8 and recital (35) of the DST proposal. 11 Article 4 of the DST proposal /18 3

4 II. LEGAL BACKGROUND Relevant Treaty provisions 7. Article 113 TFEU reads as follows: The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition. Article 115 TFEU reads: Without prejudice to Article 114, the Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, issue directives for the approximation of such laws, regulations or administrative provisions of the Member States as directly affect the establishment or functioning of the internal market. 8. Article 5 of the Treaty on European Union (TEU) reads: 1. The limits of Union competences are governed by the principle of conferral. The use of Union competences is governed by the principles of subsidiarity and proportionality.. 4. Under the principle of proportionality, the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties. The institutions of the Union shall apply the principle of proportionality as laid down in the Protocol on the application of the principles of subsidiarity and proportionality /18 4

5 III. LEGAL ANALYSIS A. Appropriateness of the legal basis 9. According to well-established case-law of the Court of Justice of the European Union the choice of the legal basis for a Union measure is not the expression of a policy preference but a legal determination which must rest on objective factors which are amenable to judicial review, in particular the aim and content of the measure The DST proposal is based on Article 113 TFEU. This provision expressly covers the harmonisation of indirect taxes only. For that legal basis to be appropriate, the DST must be considered by the EU legislator as one of the tax categories referred therein, namely turnover taxes, excise duties or other forms of indirect taxation. In contrast, were DST not to be considered as an indirect tax, the only possible legal basis - if all other conditions were fulfilled- would be Article 115 TFEU that is the residual legal basis for the adoption of Directives directly affecting the establishment or functioning of the internal market See Judgments of the Court of 11 June 1991 in Case C-300/89, Commission v Council (Titanium dioxide), EU:C:1991:244, paragraph 10; of 17 March 1993 in Case C-155/91, Commission v Council, EU:C:1993:98, paragraph 7; of 4 April 2000 in Case C-269/97, Commission v Council, EU:C:2000:183, paragraph 43; of 29 April 2004 in Case C-338/01, Commission v Council, EU:C:2004:253, paragraph 54; of 26 January 2006 in Case C- 533/03, Commission v Council, EU:C:2006:64, paragraph 43; of 6 November 2008 in Case C-155/07, Commission v Council, EU:C:2008:605, paragraph 34; of 22 October 2013 in Case C-137/12, Commission v Council, EU:C:2013:675, paragraph See Lenaerts K. and Bernardeau L., L'encadrement communautaire de la fiscalité directe, Cahiers de droit européen (2007), point /18 5

6 11. It is noted that Articles 113 and 115 TFEU provide for an identical procedure, namely special legislative procedure where the Council acts by unanimity on a proposal from the Commission after consulting the Parliament and the Economic and Social Committee. Moreover, Articles 113 and 115 TFEU share the common aim of ensuring the establishment and the functioning of the internal market and have been interpreted in a similar way by the Court 14. The only difference between the two provisions lies on the available legal instruments: Article 115 TFEU provides only for the adoption of Directives whereas Article 113 TFEU refers to the adoption of "provisions" in general. The DST proposal being presented in the form of a Directive, the conclusion on the nature of DST does not alter the legal analysis as to the existence of an EU competence for harmonisation on the matter nor the applicable procedure. 12. Consequently, the Legal Service will first examine whether the DST proposal pursues the objective of ensuring the establishment and functioning of the internal market; and subsequently, whether DST is an indirect tax within the meaning of Article 113 TFEU. 14 See, by analogy, regarding the attainment of the internal market in relation to Articles 114 and 115 TFEU, Judgment of the Court of 25 April 2002 in Case C-183/00, González Sánchez v Medicina Asturiana, EU:C:2002:255, paragraph 24. The separate mention of the distortion of competition in Article 113 TFEU is linked to the more direct impact of indirect taxes in trade among Member States, similarly to Article 110 TFEU; this mention does not alter the legal analysis of the two provisions, since the distortion of competition is anyway included in the examination by the Court of the fulfilment of the internal market aim, see for instance judgments of the Court of 5 October 2000 in Case C-376/98, Germany v Parliament and Council, EU:C:2000:544, paragraph 106 and Case C-300/89, Titanium dioxide, paragraph /18 6

7 a) Whether the DST proposal pursues the objective of ensuring the establishment and functioning of the internal market 13. According to the Court, the power of the EU legislator to adopt measures based on Articles 113 and 115 TFEU must genuinely be aimed at improving the conditions for the establishment or functioning of the internal market 15. The EU legislature may have recourse to those provisions where the differences between national rules are such as to either obstruct the fundamental freedoms and thus have a direct effect on the functioning of the internal market or to cause appreciable distortions of competition 16. Recourse to those provisions is also possible for preventing the emergence of future obstacles to trade in case Member States are about to take divergent measures 17. The emergence of such obstacles must be likely and the measure in question must be designed to prevent them The preamble of the DST proposal 19 refers to the need to tackle the fragmentation of the internal market and the distortion of competition due to the uncoordinated measures taken individually by Member States that hamper the development of new digital solutions and the EU competitiveness as a whole. 15 See, by analogy to Article 114 TFEU, Judgments of the Court of 5 October 2000 in Case C- 376/98, Germany v Parliament and Council, paragraphs 83, 84; of 10 December 2002 in Case C-491/01, British American Tobacco, EU:C:2002:741, paragraph 60; of 8 June 2010 in Case C-58/08, Vodafone and others, EU:C:2010:321, paragraph 32 and case law cited. 16 See C-376/98, Germany v Parliament and Council, paragraph 106 and C-300/89, Titanium dioxide, paragraph See Joint Judgments of the Court of 12 July 2005 in Cases C-154/04 and C-155/04, Alliance for Natural Health, EU:C:2005:449, paragraphs 29-32; of 14 December 2004 in Case C-210/03, Swedish Match, EU:C:2004:802, paragraph 30; of 13 July 1995 in Case C-350/92, Spain v Council, EU:C:1995:237, paragraph 35; C-376/98, Germany v Parliament and Council, paragraph 86; of 9 October 2001 in Case C-377/98 Netherlands v Parliament and Council, EU:C:2001:523, paragraph 15; also C-491/01, British American Tobacco, paragraph See C-58/08, Vodafone and others, paragraph 33 and case law cited. 19 See recital (6); also recital (3) is of relevance /18 7

8 15. Similarly, the impact assessment accompanying the DST proposal states that there is an urgent need for EU action because some Member States have taken or are about to take unilateral measures that cause fragmentation of the internal market 20. There are already 10 Member States that have taken unilateral action and some others have expressed the intention to act in a similar vein. According to the impact assessment, the emergence of diverging measures leads to distortions of competition, high compliance costs and possible double taxation of digitalised companies, thus obstructing the exercise of the internal market freedoms Against that backdrop, the DST proposal would introduce a harmonised system and replace the diverging measures taken (or, potentially, to be taken) unilaterally by Member States. The common DST system would thus replace those diverging measures and would remove the abovementioned obstacles to the proper functioning of the internal market. 17. It is noteworthy that the explanatory memorandum enounces some additional objectives of the DST proposal other than improving the establishment and functioning of the internal market 22, i.e. to make sure that the public finances within the Union are sustainable and that the national tax bases are not eroded; to ensure that social fairness is preserved and that there is a level playing field for all businesses operating in the Union; and to fight against aggressive tax planning and close the gaps that currently exist in the international rules which make it possible for some digital companies to escape taxation in countries where they operate and create value. Some of these objectives (i.e. fight against aggressive tax planning; level playing field) may be considered also in pursuance of the internal market objective, 20 Doc 7420/18, ADD1 REV1, pages and table (6): overview of unilateral measures taken/planned. 21 See impact assessment, page DST proposal, explanatory memorandum, pages /18 8

9 whilst some other (i.e. social fairness, sustainability of public finance) do not belong to the internal market objective. However, references to objectives not explicitly supported by the relevant legal basis cannot prevent the EU legislature from basing the DST proposal on Articles 113 and 115 TFEU, once the conditions for recourse to those provisions are fulfilled In the light of the above considerations, it can be concluded that the DST proposal pursues the objective of ensuring the establishment and functioning of the internal market. b) Whether DST is a tax within the meaning of Article 113 TFEU 19. Article 113 TFEU refers to three categories of taxes in respect of which harmonisation may be undertaken: i) turnover taxes, ii) excise duties and iii) other forms of indirect taxation. It is obvious that the DST (a tax on the revenues for the provision of certain services) is not an excise duty, the latter being understood as a tax on the consumption of certain goods 24. It must be therefore elucidated whether the DST belongs to any of the other two categories mentioned by article 113 TFEU, namely turnover taxes or other forms of indirect taxation. 23 See C-376/98, Germany v. Parliament and Council, paragraph 88; C-210/03, Swedish Match, paragraph For the definition of excise duties, see recital (9) of Council Directive 2008/118/EC concerning the general arrangements for excise duty, OJ L 9, , p /18 9

10 20. The Court has defined the notion of turnover tax in the context of the VAT Directive which prevents Member States from introducing or maintaining turnover taxes 25. This interpretation may be used to ascertain the notion of turnover tax as laid down by Article 113 TFEU, as VAT is conceived as a tax addressed to harmonise national legislation on turnover taxes in a global and comprehensive manner 26. The Court has established four essential characteristics against which the compatibility of national turnover taxes with VAT is assessed cumulatively 27 : (i) general application to transactions relating to goods or services; (ii) proportionality to the price charged by the taxable person in return for the goods and services supplied; (iii) charge at each stage of the production and distribution process, including that of retail sale, irrespective of the number of transactions which have previously taken place; (iv) deduction of the amounts paid during the preceding stages of the process from the tax payable by a taxable person, with the result that the tax applies, at any given stage, only to the value added at that stage and the final burden of the tax rests ultimately on the consumer. 25 Article 401 of the VAT Directive, Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, OJ L 347, , p. 1, according to which ( ) this Directive shall not prevent a Member State from maintaining or introducing taxes on insurance contracts, taxes on betting and gambling, excise duties, stamp duties and, more generally, any taxes, duties or charges which cannot be characterised as turnover taxes, provided however that those taxes, duties or charges do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers (emphasis added). 26 See recital (4) of the VAT Directive. 27 See, inter alia, judgment of the Court of 3 October 2006 in Case C-475/03, Banca popolare di Cremona, EU:C:2006:629, paragraphs 31 and following; judgment of the Court of 26 June 1997 in joined Cases C-370/95 to C-372/95, Careda and Others, EU:C:1997:327 paragraph 15; see also judgement of 11 October 2007 in Joined Cases C-283/06, KÖGÁZ rt and others, and C-312/06, OTP Garancia Biztosító rt and Others, EU:C:2007:598, paragraphs 50 and following, where the Court examined whether a Hungarian local business tax could be labelled as a turnover tax /18 10

11 21. Without needing to examine each of the four essential characteristics referred to in the previous paragraph, it seems obvious that the DST does not fulfil the fourth one: it consists of a tax levied on the revenue of the taxable person in such a way that it is not certain that it will be ultimately borne by the final consumer. The DST does not foresee such a mechanism for passing the burden of the tax to the final consumer nor mechanisms of deductibility to ensure tax neutrality as regards the taxable person, the tax being supported exclusively by the taxable persons to whom revenues are imputed. 22. This conclusion may not be put into question by the mere fact that the DST proposal refers to the turnover of the taxable persons in Article 4 thereof. That reference serves the purpose of delimiting the DST scope of application; taxable revenues as such are defined in Article 3 of the DST proposal. This is confirmed by the impact assessment accompanying the DST proposal, according to which "[g]iven its (preferred) features, this tax [ ] would need to be treated as an indirect tax other than turnover taxes and excise duties" Accordingly, the DST cannot be regarded as a turnover tax in the sense of Article 113 TFEU. 24. The subsequent question is whether the DST can be considered as other forms of indirect taxation as referred to by Article 113 TFEU. The Treaties contain no definition of indirect taxes and no complete, unambiguous and universally valid definition is readily available 29. However, the definition of criteria on which the choice of a legal basis depends must be ascertained. In such a case, the nature of the tax must be determined through sources and methods of interpretation of EU law, according to the objective characteristics by which it is levied. Although the classification of a tax under national law is not as such decisive 30, the interpretation of a concept of EU law must draw on the general characteristics that are common to the legal systems of the Member States. 28 See impact assessment, page 20, point 3.1, emphasis added. 29 See Lenaerts K. and Bernardeau L., L'encadrement communautaire de la fiscalité directe, Cahiers de droit européen (2007), p.1, with reference to the Conclusions of AG Stix-Hackl in Case C-475/03, Banca Popolare di Cremona, EU:C:2006:629, paragraph See Judgment of the Court of 14 January 2016 in Case C-163/14, Commission /Belgium, EU:C:2016:4, paragraph 30; of 13 February 1996 in Joined Cases C-197/94 and C-252/94, Société Bautiaa, EU:C:1996:47, paragraph 39; of 12 December 2006 in Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, paragraph 107; of 4 October 2001 in Case C-294/99, Athinaïki Zithopoiïa, EU:C:2001:505, paragraph /18 11

12 25. Indirect taxes are generally characterised in the taxonomy existing EU wide by the following three features: first, instead of applying to specific indicators of the taxpayer's wealth, they focus on specific taxable events and transactions, most typically consumption, production and sales. Second, they are usually impersonal in the sense that they do not directly and immediately take into account the taxpayer s overall capacity to pay taxes nor the latter s personal characteristics. Third, the method of application of indirect taxes presupposes the existence of two persons, the taxpayer (that provides the goods or services) and the tax bearer (the final recipient of the goods or services on whom the economic incidence of the tax falls). 26. It is also widely accepted that not all taxes that are classified as indirect fulfil each and every of the three criteria for distinction drawn above. Although all of them are relevant for the classification of a tax as indirect, the last criterion - i.e. the existence of a taxpayer and a tax bearer - should be privileged for the sake of legal certainty, bearing in mind its well defined objective and verifiable characteristics. Actually, the existence of two different persons upon which the formal and pecuniary burden falls is commonly considered as the essence of indirect taxes Conclusions of AG Stix-Hackl in the Conclusions in Case C-475/03, Banca Popolare di Cremona, paragraph /18 12

13 27. In the case of DST, the essential characteristic for a tax to be considered "indirect" - the existence of a taxpayer and a tax bearer- is absent 32. Although the Court has not required the express provision of passing the tax on the final consumer for it to be considered as an indirect tax 33, the stated objectives of the DST proposal do not provide evidence that the person finally burdened with the tax shall be the final consumer, i.e. the end user of the digital services who contributes to value creation. Actually, the attainment of the ultimate objectives of the proposal to ensure social fairness and to fight against aggressive tax planning of some digital companies 34 would not be reconcilable with the tax being passed on the end user of the digital services. As acknowledged in the preamble to the DST proposal 35, "it is the revenues obtained from the processing of user input that should be taxed, not the user participation in itself". The same reasoning applies in respect of immediate recipients of the services (e.g., publicity companies benefiting from advertising services) as the proposal foresees no mechanism for passing on the charge of the tax to them. 28. Furthermore, even though the tax is levied on total gross revenues and not on net income, the economic capacity of the taxpayer is taken into account through the delimitation of the scope of DST that covers taxable persons above certain thresholds of total amount of revenues obtained worldwide and within the Union. As stated by the Commission 36, in the case of digital companies, the low marginal costs following the development of digital goods render less relevant the distinction between gross revenue and net income. It is eloquent that on the basis of the delimitation of the scope of the DST proposal, the taxable digital companies are easily identifiable, in contrast to indirect taxes being impersonal in principle. 32 See also impact assessment, Annex 11, page 150, on the compatibility of preferred interim solution with VAT. 33 See Joined Cases C-283/06, KÖGÁZ rt and others, and C-312/06, OTP Garancia Biztosító rt and Others, paragraph 49. See also joined Cases C-370/95 to C-372/95, Careda and Others, paragraph Supra, paragraph 17 of this opinion. 35 See recital (9) of the DST proposal, last sentence. 36 See impact assessment, page 14 and page 75 with reference to relevant economic studies /18 13

14 29. An important contextual element that should also be considered is the fact that the DST has been presented in the Digital Taxation Package as a temporary measure, to be repealed upon adoption of the SDP proposal that is, in turn, a direct tax proposal based on Article 115 TFEU. The substitutability of the former by the latter demonstrate that the two proposals share the same objectives and target the same taxable persons, i.e. "the big players of the digital economy" that are "the ones responsible for the higher difference between where the profits are taxed and where value is created", as stated in the Commission's proposal 37 and accompanying impact assessment Finally, the proposal forms part of a response to an institutional request 39 to address "the challenges of taxation of profits of the digital economy". 31. Accordingly, overall considered, the aim and the main features of the DST do not naturally lead to regard it as falling within the scope of other forms of indirect tax. Consequently, the choice of Article 113 TFEU as the legal basis for the DST directive gives rise to serious doubts. 32. The residual legal basis in the Treaties for adopting a Directive aiming at ensuring the establishment and functioning of the internal market is Article 115 TFEU. 37 Recital (23) of the DST proposal. 38 Page 117 of the impact assessment. 39 See paragraph 1 of this opinion /18 14

15 B. Principle of proportionality 33. In accordance with Article 5(1) and (4) TEU, Union action may not exceed the limits of what is appropriate and necessary in order to attain the objectives of the Treaties. Where there is a choice between several appropriate measures, recourse must be had to the least onerous one, and the disadvantages caused must not be disproportionate to the aims pursued 40. In this respect, the Court 41 recognises that the legislator has broad discretion in areas where its actions involve choices of a political, economic or social nature, and where it has to make complex assessments and evaluations. The review of the Court regarding the appropriateness of a measure will not lead it to determine whether the measure adopted was the only one or the best one possible, but it will rather seek to find out whether it is not manifestly inappropriate in relation to the objective pursued 42. Yet, the exercise of the legislator's discretion must be based on objective criteria 43 and must consider all the relevant factors and circumstances of the situation the act [is] intended to regulate It is against that backdrop that the respect of the principle of proportionality should be assessed in the present case. 40 Judgment of the Court of 4 May 2016 in Case C-547/14, Philip Morris, EU:C:2016:325, paragraph 165 and case law cited. 41 See Judgment of the Court of 8 July 2010 in Case C-343/09, Afton Chemical, EU:C: , paragraphs 45-46; Case C-58/08, Vodafone and others, paragraph 52; of 14 May 2009 in Case C-34/08, Azienda Agricola Disarò Antonio and Others, EU:C:2009:304, paragraphs 76 to 83; of 7 July 2009 in Case C-558/07, S.P.C.M. and Others, EU:C:2009:430, paragraph 42; C-310/04, Spain v Council, EU:C:2006:521, paragraphs 96-99; of 12 July 2001 in Case C-189/01, Jippes and Others, EU:C:2001:420, paragraphs and the case law cited. 42 See Case C-558/17, S.P.C.M. and Others, paragraphs 41-42; Judgment of the Court of 13 May 1997 in Case C-233/94, Germany/European Parliament and Council, EU:C:1997:231, paragraph 54-57; of 12 November 1996 in Case C-84/94, United Kingdom/Council, EU:C:1996:431, paragraphs See C-58/08, Vodafone and others, paragraph 53 and case law cited. 44 See C-310/04, Spain v Council, paragraphs /18 15

16 35. As explained above, the main aim of the DST proposal is to protect the integrity of the internal market against fragmentation due to the emergence of unilateral measures taken by Member States in the wait of reaching agreement on the comprehensive solution for the taxation of the digital economy. As stated in the preamble and the explanatory memorandum of the DST proposal 45, the adoption and implementation of that solution may take time; in the meantime Member States are under pressure to take unilateral measures and at least 10 of them have already taken or are about to take such measures In this context, the DST proposal for a common tax replacing the existing and future unilateral indirect tax measures can be considered as an appropriate means for achieving the stated aim thereof. 37. It is noteworthy that alternative solutions - such as raising VAT rates on digital services, introducing a transaction tax or a tax on profits- had been envisaged by the Commission but were discarded as disproportionally complex to implement for an interim solution As to the assessment of the necessity of the DST as proposed, it must be noted that, in view of its interim nature, the DST proposal has been limited to laying down a narrow material and personal scope, simple tax allocation, rate and administrative obligations. 39. With regard to the material scope, DST would be imposed only on the supply of certain digital services where the contribution of users to the creation of value for a business is significant to such an extent that those services would not exist without user contributions 48. This narrow scope bears the lowest risk of taxing too heavily services that play a key role to the development of the digital single market Recital (6) and explanatory memorandum, page This trend has been acknowledged by more than 80% of the participants in the Commission's public consultations, see impact assessment, pages 60 and See Impact assessment, section See recital (23), explanatory memorandum, page 4; impact assessment, pages Impact assessment, page /18 16

17 40. As to the personal scope, it is also defined in a very narrow manner. This is achieved by laying down a double threshold for defining the taxable persons: first, a worldwide revenue threshold and second, an EU-wide revenue threshold. 41. The first threshold allows to capture business models that have been built around user participation and that benefit the most of the digital economy. The proposed threshold coincides with the threshold provided for in the Directive on Administrative Cooperation introducing a country by country reporting obligation 50, allowing thus an easier administration of the tax and a higher degree of compliance. At the same time, it excludes small businesses and start-ups for which the compliance burden would be likely to have a disproportionate effect The second threshold limits the application of DST to cases with a significant digital footprint in the internal market 52. The specific threshold avoids capturing activities with no sufficient link to the internal market. According to the Commission's impact assessment, it also avoids the risk of de facto discrimination against international partners, while preserving the digitalisation of the EU economy As to the rest of tax modalities, they are relatively simple to implement, in view of the interim nature of DST: a single rate allows revenue generation for Member States while avoiding distortions from a business perspective 54 ; a self-declaration system for the collection of the tax and one-stop shop for non-resident taxpayers reduce the administrative costs both for businesses and tax authorities Council Directive (EU) 2016/881 of 25 May 2016 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation, OJ L 146, p See recital (23) and explanatory memorandum, page Recital (24) and explanatory memorandum, page According to the Commission's estimation, 51% of purely domestic groups are to be captured by the proposed threshold, see impact assessment, Section 9.3.4, pages and specific figures of companies falling within the scope of the tax, page 68, Table (10). 54 See recital (35). 55 Impact assessment, pages /18 17

18 44. Last, a tax similar to the DST proposal was found to be the preferred option for an interim solution by most relevant stakeholders consulted by the Commission In view of all the above elements based on the Commission's proposal and impact assessment, the Legal Service considers the DST proposal as appropriate and as not going beyond what is necessary to attain the objectives pursued. IV. CONCLUSION 46. The Council Legal Service is of the view that: The aim and characteristics of the DST as it is proposed lead to retain Article 115 TFEU as the appropriate legal basis, rather than Article 113 TFEU; This determination does not, as such, provide the answer to the question whether DST falls within the scope of double tax treaties concluded by Member States; The DST proposal complies with the principle of proportionality out of 21 national tax authorities and 53% of respondents to the open public consultation, see DST proposal, page 6; see also Annex 2 of the impact assessment /18 18