European Commission seeks action on digital economy taxation

(CCH Daily) -- The European Commission has set out its own path towards a new taxation policy for the digital economy which it wants all member states to endorse, saying the current framework does not fit with modern realities, and global progress on this issue is not adequate.

The Commission has adopted a communication designed to create a coherent EU approach to taxing the digital economy that supports its key priorities of completing the digital single market and ensuring the fair and effective taxation of all companies.

This paves the way for a legislative proposal on EU rules for the taxation of profits in the digital economy, which the Commission says could be set out as early as spring 2018.

Pierre Moscovici, Commissioner for economic and financial affairs, taxation and customs, said: ‘The goal of this Commission has always been to ensure that companies pay their fair share of tax where they generate profits. Digital firms make vast profits from their millions of users, even if they do not have a physical presence in the EU. We now want to create a level playing field so that all companies active in the EU can compete fairly, irrespective of whether they are operating via the cloud or from brick and mortar premises.’

The Commission argues that current tax rules were designed for the traditional economy and cannot capture activities which are increasingly based on intangible assets and data. As a result, the effective tax rate of digital companies in the EU is estimated to be half that of traditional companies – and often much less. At the same time, patchwork unilateral measures by member states to address the problem threaten to create new obstacles and loopholes in the single market.

It is calling for a fundamental reform of international tax rules, arguing that the proposed common consolidated corporate tax base (CCCTB) could form the basis of these, although it is also considering what it calls short term 'quick fixes' such as a targeted turnover tax and an EU-wide advertising tax.

The Commission acknowledges that the OECD and other international bodies are also addressing these issues, and says it looks forward to the OECD's report to the G20 in spring 2018, which should set out solutions to taxing the digital economy at the international level and which can be integrated into the upcoming Commission proposal for binding rules in the EU's single market. If this is not the case, the Commission says it will be ready to present its own legislative proposals.

Reacting to the Commission’s communication, ACCA said it strongly recommended that any new measure should be embedded in the general international corporate tax framework to ensure consistency and coherence of tax rules worldwide.

Chas Roy-Chowdhury, head of taxation at ACCA said: ‘We do not believe that there should be an additional top up tax or “Google tax levy”, it is important to retain the normal tax rules for all companies. The BEPS outcomes should help move the permanent establishment rules to allow internet trades to be adequately taxed.

‘In addition, the OECD will present in April 2018 to the G20 its interim report on the taxation of the digital economy. And it is precisely expected to entail proposals of reform of international tax rules on permanent establishment, transfer pricing and profit attribution applicable to digital technologies.

'The BEPS final outcome was published and accepted by many countries over and above those which are OECD members. These measures will be fully implemented over the coming years, we thus need to be careful not to create uncertainty and make the EU a poor location to do business.’

Roy-Chowdhury cautioned that, should international action fail, any EU-only measures on permanent establishment could run the risk of creating double taxation, while any options created under the umbrella of the CCCTB would need to be carefully thought through to avoid other compatibility issues around State aid rules, fundamental freedoms, as well as international commitments under the free trade agreements and WTO rules.

OECD feedback request

The OECD’s task force on the digital economy is seeking public comments on the key issues identified in relation to the tax challenges raised by digitalisation and the potential options to address these challenges.

The Action 1 report, Addressing the Tax Challenges of the Digital Economy, was released in October 2015 as part of the OECD’s base erosion and profit shifting (BEPS) package. This report, which had been developed by the TFDE, was subsequently endorsed by the G20 Leaders in November 2015 and by the more than 100 countries and jurisdictions participating in the inclusive framework on BEPS.

The report recognised that digitalisation and some of the resulting business models present some challenges for international taxation. However, the report also acknowledged that it would be difficult, if not impossible, to ‘ring-fence’ the digital economy from the rest of the economy for tax purposes because of the increasingly pervasive nature of digitalisation. While digitalisation and the resulting business models do not generate unique BEPS issues, some of the key features of digitalisation exacerbate BEPS risks.

The task force on the digital economy’s request for input outlines the background on the work regarding the tax challenges of digitalisation from the BEPS Action 1 report and invites comments on the impact of digitalisation on business models and value creation, challenges and opportunities for tax systems, the implementation of the measures outlined in the BEPS package and potential options to address the direct tax challenges of digitalisation.


The deadline for comments is 13 October.

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