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EU Commission Told To Flesh Out Digital Tax Plans

by Ulrika Lomas,, Brussels

28 March 2018

The EU's Regulatory Scrutiny Board has criticized the bloc's announcement of measures to tax the turnover of certain digital firms' activities, saying that the Commission has failed to fully flesh out its proposals, substantiate the need for them, or analyzed their potential impact.

The European Commission on March 21 released two proposed amendments to international tax rules to ensure digital business activities are taxed "fairly" and in a growth-friendly way in the European Union. The proposals are in response to calls from member states for a permanent and lasting solution, to ensure a "fair share" of tax revenues from online activities where digital firms derive revenue from users in their territory, which might otherwise go untaxed.

The EU has proposed two measures: an interim tax on the turnover of companies engaged in digital activities that would otherwise go untaxed, at a rate of three percent; and a longer-term solution, which the EU will seek to achieve international consensus on under the leadership of the OECD, which would establish new digital permanent establishment rules. It is proposed that a digital platform will be deemed to have a taxable "digital presence" or a virtual permanent establishment in a member state if it fulfills one of the following criteria:

  • It exceeds a threshold of EUR7m (USD8.58m) in annual revenues in a member state;
  • It has more than 100,000 users in a member state in a taxable year
  • Over 3,000 business contracts for digital services are created between the company and business users in a taxable year.

Meanwhile, the interim measure would be levied on revenues created from selling online advertising space; created from digital intermediary activities; and those created from the sale of data generated from user-provided information. Such would apply only to companies with total annual worldwide revenues of at least EUR750m and EU revenues of EUR50m.

In a March 23 opinion on the proposed measures, the Board said its overall opinion of the measures is "positive with reservations."

It said the proposals contain significant shortcomings that need to be addressed. For instance, it said, the Commission has failed to clearly explain the context of the initiative and the rationale for a two-pronged approach. Further, it has not explained the urgency for the EU to act, before global progress is achieved at an OECD/G20 level.

Further, it said that the projection of the implication of the baseline scenario is incomplete and the content of the options is insufficiently detailed. The panel called also for clarification on what would happen in the transition between the proposed short-term policy solution and the long-term solution.

Last, it said the analysis of the impacts is insufficiently developed, especially as regards the thresholds and compliance costs and therefore does not demonstrate the proposals are proportional.

The panel has said the Commission should report on the policy context, looking at global progress made on digital taxation and justify why the EU should act unilaterally in implementing an interim turnover tax on certain digital revenues. The Commission also recommended that it counterbalance its proposal for a temporary tax with an explanation of how unilateral actions from member states could have an impact on tax competition, market fragmentation, and tax avoidance. "It should stress that the aim of the initiative is clarity on the taxing right allocation and not ensuring a fair tax burden on digital versus non-digital companies," it said.

On the options being proposed, the Commission has been asked to flesh out what would happen in the transition between the measures. For instance, what would be taxed under the long-term solution and how; how the digital PE proposal would interact with double tax treaties; and how the measure ties in with the Commission's proposal for a common corporate tax base, which would enable unitary taxation of multinational companies in the EU, and the division of those revenues to member states based on substance under a formulary apportionment approach.

The panel has called on the report on the measures to be amended prior to being tabled for consideration before EU bodies and the member states.

TAGS: compliance | tax | business | European Commission | value added tax (VAT) | tax avoidance | transfer pricing | G20 | European Union (EU) | services | Europe | BEPS

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