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EU Unveils Proposals On Digital Taxation

by Ulrika Lomas, Tax-News.com, Brussels

22 September 2017


The European Commission has published its vision for the "fair taxation" of the digital economy, with options including a new EU equalization tax on the turnover of digitalized companies.

The Commission has adopted a Communication entitled "A Fair and Efficient Tax System in the European Union for the Digital Single Market."

The Commission believes that the two main policy challenges to be addressed concern the issues of "where to tax" and "what to tax." It contended that new international rules specific to the challenges posed by the digital economy are needed, to determine "where the value of business is created and how it should be attributed for tax purposes."

In particular, the Commission sees this as entailing reform of international tax rules on permanent establishment (PE), transfer pricing, and profit attribution.

According to the Communication, "There are weaknesses in the international tax rules as they were originally designed for 'brick and mortar' businesses and have now become outdated. The current tax rules no longer fit the modern context where businesses rely heavily on hard-to-value intangible assets, data, and automation, which facilitate online trading across borders with no physical presence."

The Commission argued that the situation is unsustainable, and will lead to more opportunities for tax avoidance, losses in tax revenues, and an unlevel playing field for businesses. It said that, on average, "domestic digitalized business models are subject to an effective tax rate of only 8.5 percent, less than half compared to traditional business models," and that cross-border digitalized businesses "benefit from a similarly low tax burden, even without accounting for aggressive cross-border tax planning."

The report noted that the OECD will in early 2018 present an interim report on the taxation of the digital economy, but stressed that in parallel the EU needs to examine all possible options for taxing the digital economy within the single market and that the bloc should focus on EU-specific solutions if progress at international level proves too slow.

The Commission said that its preferred option for addressing these challenges is the adoption of its common consolidated corporate tax base (CCCTB) proposal. It stated that the CCCTB provides an EU framework for revised PE rules and for allocating the profit of large multinational groups using a formula apportionment approach that would better reflect where the value is created. It added that there is scope within the current CCCTB proposal to ensure that it effectively captures digital activities.

However, the Commission also outlined a number of more immediate, supplementary, and short-term measures that could be considered while discussions on the CCCTB continue. Among the options posited in the Communication were:

  • An equalization tax on the turnover of digitalized companies. This would apply to all "untaxed or insufficiently taxed" income generated from internet-based business activities, creditable against corporate tax or as a separate tax;
  • A withholding tax on digital transactions. This would operate as a standalone gross-basis final withholding tax on certain payments made to non-resident providers of goods and services ordered online;
  • A levy on revenues generated from the provision of digital services or advertising activity. This could be applied to all transactions concluded remotely with in-country customers where a non-resident entity has a significant economic presence.

Further political discussions between EU member states will take place at the Tallinn Digital Summit on September 29. The Estonian Council Presidency will continue working on these issues, with a view to securing Council conclusions by the end of the year. These conclusions would lay the basis for future work in the single market.

TAGS: compliance | tax | business | European Commission | tax compliance | tax avoidance | accounting | corporation tax | Estonia | tax thresholds | internet | tax planning | transfer pricing | tax rates | withholding tax | tax reform | European Union (EU) | services | Europe | Tax | BEPS

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