The Ministry of Finance has presented a legislative draft of the taxation of income from digital services, a so-called “digital tax”, and it has sent it for external consultation.
As has already been mentioned in our previous article, the Ministry of Finance brings a proposal of a digital tax rate in the record amount of 7% for selected internet services provided in the Czech Republic.
The newly taxed services will include:
1. Placement of targeted advertising on the internet;
2. Digital mediation services; and
3. Sale of user data.
Based on the current wording of the act, companies meeting the following two conditions will be subject to the tax from mid-2020:
4. The company has consolidated income exceeding EUR 750 million; and simultaneously
5. The aggregate amount of payments for the taxed services provided in the territory of the Czech Republic exceeds CZK 50 million.
The purpose of the digital tax is clear from the statement of reasons and it has been confirmed by the Ministry of Finance itself. The objective is the fair taxation of large technological companies that are not based in the Czech Republic. Typically, they are large technological giants that operate social media, internet search engines, mediators of goods or services, etc. The term ‘not based’ is absolutely essential in this case. However, the choice of terminology in the draft bill does not lead to a clear definition and at present, the obligation to pay digital tax would concern even entities of multinational companies which are properly registered in the Czech Republic and pay corporate income tax. Should the wording of the draft bill remain unchanged, these companies would suffer a significant disadvantage compared to their domestic competitors and it could even lead to a decrease in the economic activity of these companies (which was certainly not the original intention).
The tax base is composed of sales of selected digital services attributed to Czech users. The nationality of users should be determined based on IP addresses, which the companies will newly be required to track. At present, it is not clear from the draft bill what should be done in the event that it is not possible to determine the state where the user is located based on the IP address and at the same time the user’s address is not known. The draft bill does also not take into consideration the possibility of manual software changes of the IP address.
The consultation proceedings brought many other questions relating to the practical application of this new type of tax. Deloitte takes an active part in the consultation and we will continue to keep you up to date on the resolution of the comments and any potential changes.
The article is part of dReport – August 2019, Tax news; Grants and investment Incentives.