The Spanish Tax Authorities has issued a new tax binding ruling (V0075-24) regarding two of the three Spanish taxable events provided for in Law 4/2020 of 15 October 2020 on the Tax on Certain Digital Services (the “TCDS Law”).

The new tax ruling concerns to online advertising and data transmission services and was much anticipated as the Spanish General Directorate of Taxes (“GDT”) had so far only ruled on intermediation services, when these two taxable events can prove equally, or indeed more, important in digital businesses.

This tax ruling is interesting, not only because it is the first in relation to the two taxable events in question, but also because it addresses a scenario in which the services are provided, and the consideration paid under a single contract (which the GDT terms a “mixed” contract) and confirms the tax treatment applicable to so-called “affiliate networks” in cases of online advertising.

In such cases where a single service involves several taxable events, one of the difficulties often lies in distinguishing between the different services and the income corresponding to each one and, hence, in ascertaining the precise composition of the TCDS tax base. Until now, in some scenarios, it was argued that the taxpayer could fall into one or the other taxable event and could even be treated as "subsidiary" by the Spanish Tax Authorities (“STA”) on some occasions i.e., if it did not fall under one of the digital services, it fell under the other. In its tax ruling, the GDT appears to adopt a more purist approach, taking the view that part of the remuneration may correspond to one digital service and part to another taxable event (although it is true in this case that the contract examined in the ruling appears to distinguish between the two digital services).

The case analysed concerns a contract between (i) a company that owns a digital interface via which it provides digital TV and audiovisual content aggregation services and (ii) a (non-resident) third party that uses proprietary software installed on the decoders and ITPV networks of the digital TV interface to insert advertising on the interface and collect the data of its users.

The digital TV interface company receives consideration for the assignment of advertising space in the form of:

- 50% of the income received by the company inserting the advertising from advertisers;
- the insertion of a limited number of “in-house” adverts to promote its own products and services; and
- the temporary transfer of user data collected via the software of the company inserting the advertising.

Online advertising

The GDT makes several interesting observations regarding the online advertising services:

  • It confirms that the advertising included on these TV platforms falls within the definition of “targeted” online advertising, without going into detail on this matter.
  • It rules that, as it is inserted by a third party, own advertising is also to be treated as part of the tax base: "The inclusion of interface owners' own advertising as agreed in the contract does not alter this. As such, the role of interface owners in the insertion of their own advertising is comparable to that of third-party advertisers, even where the advertising is ultimately inserted into their digital interfaces.”
  • It analyses “indirect” remuneration. In other words, it finds that although the company concerned only receives 50% of the income, if no other services were rendered, the remuneration would be higher (“the percentage of the income from the third-party advertisers that the requesting taxpayer would transfer to the interface owners would be higher”). In the case at hand, this means that the TCDS taxpayer (the third party inserting the advertising) must pay tax on all of the income received from the advertisers, plus the value attributed to what the TV interface “pays” to insert its own advertising.
  • In examining the taxable event, the GDT describes the way in which these services should be provided in accordance with its Resolution of 25 June 2021 and the examples included in the FAQ, distinguishing between the supply-side and demand-side players, and concluding that "the provider of the advertising service, and thus the party liable for the tax, will be the entity, on the supply side, that inserts advertising content to be displayed to each user on the digital interface". It stresses the fact that the advertising may be placed by the interface owner itself or by a third party. On this point, the GDT specifically refers to “affiliate networks”, which it defines as the third parties that “combine the advertising spaces (“inventory”) of one or more interfaces, enabling their owners to monetise such spaces, while, in turn, providing advertisers with a wide-ranging catalogue of interfaces on which to display their advertising” and which, owing to their nature, should in principle be considered liable for the tax, notwithstanding the provisions of the relevant contract in each case.

“The provider of the advertising service and, by extension, the party liable for the tax, shall be the entity, on the supply side, that inserts advertising content to be displayed to each user on the digital interface. Such insertion may be carried out by the interface owner itself or via a third party that, under an agreement with the former, markets the owner’s inventory of advertising spaces, acquiring the right or obligation to insert advertising on such spaces. These third parties are now referred to as affiliate networks (...).

In short, where an interface owner assigns its advertising spaces to an affiliate network for marketing purposes, the provider of the online advertising service and, by extension, the party liable for the tax shall be the affiliate network.”

  • It confirms, in any case, that there may only be one taxpayer in order to avoid cascading taxation. However, it clarifies in this regard that “(...) notwithstanding the fact that the rest of the entities involved, on both the supply side and the demand side, may provide other taxable services (online intermediation or data transfer)”. It remains to be seen how the STA will interpret this “closing clause”.

Data transmission

As regards data transmission, the GDT's interpretation of what it considers to be “data” (“the user data gathered, after having been generated by the activities of by such users on digital interfaces”) for the purposes of article 4.8 of the TCDS Law is particularly relevant, as the Law includes no definition, per se, of the concept of “data”.

In the case analysed, the user data collected relate to "tastes, preferences, connection times, products consumed and, in general, data that allow commercial profiling and statistical data of relevance to the design of commercial strategies", with the GDT taking the view that these constitute "data" for the purposes of the taxable event.

In short, the GDT appears to establish that a distinction must be drawn between the different services and the portion of the tax base corresponding to each of them, even where the remuneration is indirect and/or has no specific value (“the entity inserting the advertising may also provide other taxable services where it pursues other activities in addition to those comprising the online advertising service”). Nonetheless, it does not clarify how to determine the income corresponding to each service, stating that "in any event, determination of the value attributed to the different services will depend on the specific facts and circumstances".

Equally noteworthy is the GDT's specificity as regards “affiliate networks”, as it confirms that where an interface owner assigns its advertising space to an “affiliate network” for marketing purposes, the latter shall be deemed the provider of the online advertising service and, therefore, the party liable for the tax.

Finally, it is interesting that the GDT appears to leave open the possibility of there being other services, by confirming the non-existence of cascading taxation in the case of online advertising. For example, in cases in which it is the digital interface itself that inserts the advertising, in which case the GDT appears to take the view that the affiliate network or entity that stands between the advertisers and the interface may in some cases be deemed the provider of a digital service such as intermediation.

author: Carlos Guerrero Ros - Senior Manager Corporate & Digital Taxation, KPMG Abogados