WALLESS Carries out Legal Study of Digital Services Tax Implementation Options in Latvia Commissioned by the Ministry of Culture
WALLESS carried out a legal study of digital services tax (DST) implementation options in Latvia, which was commissioned by the Ministry of Culture.
Against this background, Ingūna Ābele gave a presentation Digital service tax implementation options in Latvia in the discussion organised by Stockholm School of Economics in Riga on 15 January.
The discussion was held to encourage Latvia to follow the example of other European Union Member States and develop a digital services tax regulation at national level.
Rampant growth of the digital economy has led to the problem of tax regulation. Significant amounts of digital services can be provided remotely over the Internet, i.e., without physical presence. This creates a tax collection problem in the country where the value is generated but the company is not registered, as there is no permanent establishment in that country (there must be a physical presence to have a permanent establishment) and therefore no income tax is payable.
Solutions to the problem have been developed at different levels:
(1) implementation of international solutions is a long and complex process. Furthermore, the effect and results are not clear;
(2) solutions developed at EU level (including EU-level DST) have not been unanimously supported;
(3) several EU Member States have introduced their own DST.
The introduction of DST is a solution to a problem that can be unilaterally implemented by the state. To date, DST has been implemented in France (retroactively from 2019) and Italy (from 2020). In Austria, however, DST is introduced only for advertising services (from 2020). Several other countries have drafted bills and are still planning to introduce DST.
Legally, it is possible to introduce DST in Latvia as well. The DST rate could be 3% of turnover, just like under the taxation model developed by EU and other countries. However, the introduction of DST also triggers certain risks of double taxation, litigation, etc.
Only the following digital services would be subject to DST:
(1) advertising on the Internet targeted at users of the digital interface (websites, mobile apps, etc.) (online advertising);
– Google, Youtube, Criteo, Facebook, Alibaba, etc.
(2) Internet “brokerage” services (platform enabling users to communicate, transact and interact in a similar way);
– Airbnb, Alibaba, Amazon, Booking, Rakuten, Zalando, etc.
(3) sale of data collected from user activities in the digital interface.
Data obtained during the study shows that a number of EU-registered digital companies providing said digital services generate significant revenues in Latvia. In the 10 months of 2019, seven digital companies have earned at least EUR 113,791,896.05 (proportionally EUR 140 million per year) from VAT payers that are registered in Latvia. Compared to 2018, the income of said companies has increased by 50%. Based on estimates from other countries, the study concludes that the total taxable income for DST purposes could be around EUR 17-30 million a year.
Survey data on the earnings of large digital companies show that in 2019, two digital companies (based primarily on advertising) generated higher profits than the entire Latvian advertising market in 2018.
Consequently, according to the authors, DST is also a way for Latvia to reduce distortions of competition and to generate tax revenues from digital companies with significant income in Latvia. In addition, according to the authors, the funds obtained from DST could also support the Latvian media, which create content that is important to the people of Latvia, but whose advertising market is directly influenced by large digital companies.
Ingūna ĀbeleLead of Tax Practice in Latvia
Kristers ZālītisSenior Associate
Andis OzoliņšAssociate Partner | Attorney at Law
Tatjana SinkevičaSenior Associate