Draft bill on taxation of digital services
On 18 November 2019, the Czech government approved a draft bill on the digital services tax. The draft of the new bill is being sent to the Chamber of Deputies of the Czech Republic and the legislative process of its passing has thus begun. The government expects the bill to come into force in the course of next year and the new tax will be collected from transactions that will be performed after the bill has taken effect, i.e. starting from the fifteenth day after its promulgation. This is a very short implementing deadline, which does not give taxpayers much time for possible adjustment of systems. We therefore recommend dealing with this tax and its potential effects as soon as possible.
The current government draft of the digital tax bill has been largely inspired by the original proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services from 21 March 2019. You can find the draft HERE.
Although the Czech Republic (hereinafter “CR”) had a disputable position to taxation of digital services, it is now implementing the digital tax. In its explanatory memorandum, the government informs that this is a one-sided solution, because a coordinated approach to taxation of digital services on the level of the EU has failed. With this move, the Czech Republic is thus joining countries like France, Italy, Austria or the Great Britain, which are also planning to introduce or has already introduced a digital tax.
Implementation of the tax does not mean, though, that CR would cease to support finding a global solution on the level of the OECD (the so-called Inclusive Framework). On the contrary, the explanatory memorandum says this move is an expression of pressure on international institutions to find a solution on the international level.
In order for the tax to be negotiable from the perspective of the current international system of taxation (especially double taxation treaties), the tax is constructed as transactional indirect tax (focusing on digital service as a transaction and taxing its consumption). The digital tax basically imposes a tax on (i) performing a targeted advertising campaign in CR, (ii) using a multilateral digital interface in CR and (iii) providing data on users collected in connection with user access from CR.
We would further like to familiarise you at least in general outline with the legislative draft of this new tax.
To whom does the digital tax apply, or who is the taxable person?
The act defines a range of entities it applies to. In the terminology of law, these are taxable persons. Taxpayers come from these persons; of course, certain conditions need to be fulfilled first for taxable person to become a taxpayer (see the following question). The taxpayers are then obliged to charge digital tax from services, if performed in CR.
When defining the taxable persons, the act accentuates two criteria, these being (i) their global significance and (ii) significant digital presence in CR. The taxable person is thus basically a legal entity or an entity without legal personality, if (i) its total revenues exceed the sum of EUR 750m in the reference period and at the same time (ii) revenues in this reference period that come from transactions performed in CR (see further) exceed the sum of CZK 50m. A taxable person is also every member entity of a group (no matter whether a group is Czech or foreign), if the consolidated group revenues exceed the above-mentioned limits (EUR 750m and CZK 50m). So, for a group, consolidated revenues are the starting point.
Who is obliged to charge digital taxes from transactions, or who is the taxpayer?
The taxpayer is a taxable person that performs digital services in CR above a certain minimum limit. The digital tax thus does not affect small companies, which, while being part of groups with significant digital presence in CR, do not themselves participate in the main activity of this group, because they only offer services in smaller scope. The law thus defines the payer of digital tax as a taxable person that performed targeted promotion campaigns in CR or provision of data about users collected in connection with accesses of users from CR for at least CZK 5m in the reference period. If such a service is performed together with another member entity of a group, then the values of the services for these entities are added up for the purposes of comparison with the CZK 5m limit (to prevent evasion of taxation). In case of use of a multilateral digital interface, the taxpayer is a taxable person, which has a minimum of 200,000 user accounts in this interface in the reference period.
From when am I a taxpayer?
For an answer to this question, the reference period is important. The reference period is basically the last accounting period, for which a financial statement, or consolidated financial statement in case of groups of companies, has been compiled before the first day of the taxable period. How does it work? If the bill takes effect this year, as the government currently claims, the first taxable period for the digital tax will be the calendar year of 2020. If we consider for example the situation of a group of companies with a calendar year then the last accounting period, for which a consolidated financial statement will be available as of 1 January 2020 (the beginning of the taxable period for the digital tax), will be the calendar year 2018. The calendar year 2018 will then be the reference period and in it, the above-mentioned limits for a taxable period (EUR 750m and CZK 50m) and for the taxpayer (CZK 5m or 200,00 set-up user accounts) must be tested. If these limits are exceeded in this period, then with the first taxable service after the law has taken effect, the respective member entity providing the service becomes a payer of the digital tax. It then has a statutory 15day deadline for registration with the Specialised financial office.
The law also treats the situation, when there are no adequate data to verify the above-mentioned limits. This is for example a situation when a group of companies is not able to verify, if the CZK 50m limit has been achieved or not. In such a case the law says that a qualified estimate is to be used. The Specialised financial office may question the adequacy of this qualified estimate.
What digital services are subject to tax?
It is necessary to realise that the digital tax is an excise tax, i.e. it is collected on the transactional basis. The tax itself has three partial taxes, which are imposed on transactions (only transactions against remuneration) in these areas:
- Partial tax on performing a targeted advertising campaign
The object of this partial tax is the performance of a targeted advertising campaign on a digital interface against remuneration on the territory of CR. A digital interface is any software accessible to a user. It is for example a website, an internet application, a mobile application (for example Facebook). These applications then get within the scope of the act, if targeted advertising is placed on them. Targeted advertising is advertising, the placement of which depends on data collected about this user, or about the device, the user has used when accessing the interface. Not only the placement of targeted advertising is taxable, but also additional services directly linked to the placement of the advertising itself, such as consulting, placement in a better position or evaluation of the advertising placement. This may be a service prior to the advertisement itself or after. The law defines remuneration rather broadly, with regard to the various models of charging. With regard to the fact that the tax is a transactional one, the used model of charging plays and important role. In addition, the law also provides for the situation, when an advertising campaign is provided by someone else than the operator of the digital interface. This is a situation, when a part of the interface is left to another entity to use for placing targeted advertising. The tax obligation then arises for the provider of the advertising, not the operator of the interface.
- Partial tax on the use of multilateral digital interface
The object of this partial tax is the use of a multilateral digital interface against remuneration on the territory of CR. Multilateral digital interface is basically software (for example a website, social network, an application or a mobile application), the economic purpose of which is to connect supply of and demand for goods and services. This is an electronic equivalent of a market place. It is not a classic internet shop, though, where service is provided or goods supplied by the operator of this shop. Here, no payment for the use of a multilateral digital interface takes place, but payment for goods or service. A multilateral digital interface enables transactions between its users. The object of this partial tax then includes payments for concluding a transaction, if at least one Czech user of a multilateral digital interface is a participant in the transaction. Payments for making the interface itself accessible (i.e. various regular fees) paid by a Czech user are also an object of the tax.
The object of the partial tax does not include for example regulated financial services (for example fees for the use of regulated financial networks), operation of Internet gambling, multiplayer games on the Internet, communication interfaces etc. Last but not least, the fees for using a digital interface for the purpose of supplying digital content to users will not be subject to taxation (this exemption will not apply to cases of digital content provision based on transactions between users – for example the transaction of sale of a mobile application between a user/developer and a user/telephone owner).
- Partial tax on providing data about users
The object of this partial tax is the provision of data created or collected based on access of a Czech user. This includes sale of these data or their exchange or barter. For taxation, it is necessary to know the content of the data set.
Determination of the location of the user, or the place of provision of taxable service?
To determine the tax obligation, it is essential to correctly determine the location of the digital interface user. This is necessary for determining, where the digital service was provided. Only a provision of service against remuneration that took place on the territory of CR is taxable. The rules for determining the country, to which the user belongs, differ depending on the individual partial taxes. It is always in some way connected to the country, in which the technical device was located at the time of provision of the service, however. The IP address (despite its shortcomings) will primarily be used, to determine the location of the user that accesses the digital interface. If the payer is not able to find out the IP-address, the user's domicile or registered office will be used secondarily. If even these are not known, other rules are applied.
How is the tax base assessed?
The digital tax is a transactional tax – a transaction, i.e. a certain digital service, is subject to transaction, for example performing a targeted advertising campaign on digital interfaces. Every digital service has its negotiated price, or the way of determining remuneration/price, for example remuneration set up using the “pay per click” model, to pay a price per 1 click. Remuneration itself may apply to Czech users as well as to foreign users. The law is aware of this fact that a transaction may include Czech and foreign users. So, the law provides for this fact in the definition of the tax base. The definition is based on the principle that only a part proportionally corresponding to CR enters into it. In case of the above-mentioned targeted advertising campaign, for example, when payment reached 100 and the number of clicks reached 80 among Czech users and 20 among foreign ones, the tax base for this advertising campaign would be 80 (100 x 80 / (80 + 20).
What is the tax rate?
The tax rate is 7 % from the tax base. The tax rate is the same for all partial taxes.
When does a tax obligation from a taxable service arise?
With regard to the fact that taxable services will probably be provided for a certain period of time, the law defines a day of performing taxable service. This is the day, as of which the digital tax on the service is to be collected, or more precisely this day allocates the service and the related tax to the respective taxable period. The rules for its determination differ for every taxable service.
- In the case of performing a targeted advertising campaign, it is the day, on which the last chargeable event took place.
- In the case of using a multilateral digital interface, several options may occur. If a transaction is concluded between users during this use, the day of performing taxable service is understood to be the day, on which all participants in the given transaction are known. In case of payments for access to the multilateral digital interface, the day is determined according to the due date of remuneration or its first part.
- In the case of provision of data about users, the day, on which the data that are subject to the given transaction were provided, is considered to be the day.
If, as of the day of performing taxable service, the total remuneration is not known, then the tax obligation falls on the day, as of which remuneration is known.
Submitting the tax declaration, due date of the tax and advance payments
The taxable period is a calendar year. The first taxable period will be the calendar year 2020, if the act takes effect next year. In order to prevent taxation of services, which occurred before the act took effect, it explicitly stipulates that transactions, which took place before the act took effect, are not subject to it.
The tax is due on the last day of the deadline for submitting tax return. The rules for submitting tax return are governed by the Code of tax procedures. The tax declaration is thus submitted within 3 months after the end of the taxable period at the latest. If the tax declaration is drawn up and submitted by a tax advisor based on a power of attorney, for example, the deadline may be up to 6 months.
The law further stipulates the obligation of monthly advance payments. Their amount is based on the most recent tax obligation. The act governs the special procedure for determining advance payments for the first year. The advance payment is, in principle, based on a qualified estimate. The tax administrator may question its adequacy.
The act stipulates the obligation to keep records for better control of tax obligations. The exact scope of these records will not be known until the publication of the tax declaration for this tax. Nevertheless the explanatory memorandum states examples of the possible form of the record-keeping obligation. According to the explanatory memorandum, it will most probably be necessary to state not only a description of the taxable service or part of remuneration corresponding to CR in the tax declaration, but also for example a designation of accesses related to the occurrence of the chargeable event.
The concept of an unreliable payer of the digital services tax
In addition to standard sanctions, which may be imposed according to the Code of tax procedure, the digital tax act comes with the concept of an unreliable payer. The act enables classifying a taxpayer, who in a serious way does not fulfil his obligations in the administration of this tax, as an unreliable payer and to further publish this fact about the payer. This is a sanction affecting the reputation of the taxpayer.
Although the draft needs to pass through the classic legislative process, the Czech government expects it to take effect in the year 2020 already. The law does not give much time for its implementation and potential registration, though. If the tax may apply to you, we recommend resolving it in advance. We will keep you informed about further development. In case of any questions regarding this issue, please, do not hesitate to contact us, of course.
Veronika Džalavjan and Štěpán Osička