Poland Digital Services Tax | DST - TheAdviserMagazine.com

Poland’s Ministry of Digitalization started a public consultation on a new proposal for a digital service taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. (DST). Since 2020, Poland has levied a 1.5 percent digital tax on audiovisual media services and audiovisual commercial communications. Now, a new 3 percent DST proposal plans to tax targeted advertisements, multilateral digital interfaces, and monetization of user data, excluding activities like regulated financial services, direct online sales, and publishing. This would be an important policy shift with potentially harmful consequences for all stakeholders.

DSTs Tax Revenues Rather Than Profits

Unlike corporate income taxes, DSTs are levied on revenues rather than profits. Historically, European countries have turned away from these types of taxes because even low tax rates can translate into high effective tax burdens. For example, if a company has €100 in revenue and €90 in costs, it will earn €10 in profit. Under the current law, if a 1.5 percent DST is applied to that revenue, the company would owe €1.5 in tax (1.5 percent of €100 in revenue). For this company, a 1.5 percent tax on revenue equals a 15 percent tax on profits (a €1.5 tax on a €10 profit).

However, under this new proposal, if a 3 percent DST is applied to that same company, the company would owe €3 in tax (3 percent of €100 in revenue)—a 30 percent tax on profits. The following figure shows how different profit margins for that same company earning €100 in revenue relate to different effective tax rates, under the current (1.5 percent) and proposed (3 percent) DST rates. With a 3 percent DST, if that company only earned a 5 percent profit margin, the effective tax rate would be 60 percent. With a 25 percent profit margin, the effective tax rate would be 12 percent.

Even before this proposal, the DST led to a disproportionate tax burden being placed on companies with lower profit margins—the less profitable a company was, the higher its effective tax rate became. DST tax bases correspond poorly to profits, cash flow, or ability to pay. However, a 3 percent DST would strongly impact all companies, regardless of profitability.

While the new DST proposal states that the tax liability would be reduced by the amount of corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. paid in Poland, the levy is designed to target companies without a physical presence in the country. Many such businesses have low corporate income tax payments in Poland because corporate income taxes traditionally operate on “source-based” rules, where taxes are assessed in the place where production happens.

Threshold

The DST targets companies with global revenue of €1 billion, and a Polish revenue threshold above €6 million (PLN 25 million). This threshold makes the DST discriminatory in terms of company size. The revenue threshold results in the tax only being applied to large multinationals. While this can avoid burdening smaller companies, it also provides a relative advantage for businesses below the threshold and creates an incentive for businesses operating near the threshold to alter their behavior.

This proposed DST, which functions like a tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. on certain services, is designed to be discriminatory; it will target industries largely dominated by US companies. The US government has voiced opposition to DSTs over the last decade, with President Trump using Section 301 investigations in his first term, and, more recently, the US Congress threatening the Section 899 retaliatory tax. Should the proposed measure become law, the US is expected to respond with retaliatory trade measures. The 301 tariffs would effectively tax Polish exports, while an 899-style retaliation would tax Polish investments in the US, and neither outcome would be beneficial for Poland or for the global economy.

Economic Incidence

Proponents of the new DST argue that it will support digital sovereignty, provide funds for combating the harmful consequences of using social media, and ensure a level playing field for domestic firms. However, if a small domestic firm is below the threshold, it owes no tax, while a large global company does. That’s not a level playing field—it’s preferential treatment. Additionally, it overlooks the economic reality of tax incidenceTax incidence is a measure of who bears the legal or economic burden of a tax. Legal incidence identifies who is responsible for paying a tax while economic incidence identifies who bears the cost of tax—in the form of higher prices for consumers, lower wages for workers, or lower returns for shareholders.. A recent research paper by economists Dominika Langenmayr and Rohit Reddy Muddasani shows that the attempt to target big digital platforms misses the mark, as the cost mostly falls on consumers. This outcome is especially likely when the taxed service is genuinely valuable, but a small open economy like Poland lacks domestic substitutes for the provider.

A Higher and Broader DST Will Not Collect Substantial Revenue

Part of the justification for introducing the 2020 1.5 percent DST was to compensate the Polish Film Institute for the reduction of revenues caused by the COVID crisis. The levy, initially introduced as part of a pandemic stimulus package, later became permanent. The government expects to raise €400 million (PLN 1.7 billion) with this new tax in 2027, around 0.3 percent of the total tax revenue. Experiences from other European countries also show that digital services taxes tend to generate only limited revenues. DST revenue in Austria, France, Italy, Spain, Turkey, and the UK ranged from €103 million (Austria) to €1.03 billion (the UK) in the most recent year revenue was reported. Turkey’s DST, with a tax rate of 7.5 percent, brings in the most at 0.14 percent of total revenues.

Even if Poland were able to raise the estimated additional revenue with this new DST, the amount raised would still be less than one percent of the country’s general revenue.

DSTs Are Not the Answer

If Poland is worried about raising more money from digital services, then it should continue reforming its value-added tax (VAT) to effectively tax these services at the point of consumption. Additionally, broadening the VAT tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. by eliminating reduced rates and exemptions would bring in additional revenue of up to €50 billion euros, increasing Poland’s VAT revenue by 93 percent while causing fewer distortions in the economy. Finally, the VAT is trade-neutral and does not discriminate between firms.

Since a new DST could put an additional burden on consumers, trigger trade tensions, and fail to significantly increase Poland’s revenue, it’s time for policymakers to reconsider their approach. Rather than expanding the DST, they should eliminate it altogether. The core purpose of tax policy is to raise revenue efficiently, and there are far more effective tools to achieve that goal.