Taxing the digital economy: state of play in the EU
The French, German, Italian and Spanish finance ministers recently issued a statement, which in the meantime is backed by six more Member States. They call on the EU Commission to go beyond the work undertaken at the OECD/G20 and explore options for introducing - in addition to corporate tax harmonisation (CCCTB) - an 'equalisation tax' on the turnover of digital economy businesses in the EU. This tax should 'equalise' what digital companies should pay in the EU, had they been conventional businesses with a 'taxable presence'. India, as an example, already in 2016 introduced an equalisation levy of 6% on payments to non-resident businesses for online advertising services.
Other recent initiatives focus on expanding the concept of permanent establishment to include a digital presence ('virtual' permanent establishment).
The main hurdles in the upcoming negotiations at EU level consist of, inter alia:
- The diversity of business models in the ‘digital economy’ (online retail, digital advertising, digital products, collection and exploitation of data, etc.);
- The difficulty to find one preferred solution to move the point of taxation from the country of residence of the digital business to the countries where the customers reside, but where the digital businesses have no or only little physical presence. A clear-cut solution is difficult under the current international taxation principles;
- The need to take into account the impact of new rules on traditional businesses, though the reluctance to have rules specifically targeting the digital economy may be disappearing;
- The need to achieve unanimity of all EU Member States, despite diverging interests, and to avoid putting EU companies at a competitive disadvantage with foreign digital businesses by going too quickly and too far beyond BEPS implementation; and
- The risk that some Member States may adopt unilateral measures creating double or multiple taxation. An example is the UK diverted profit tax that was introduced in 2015.
Taxing the digital economy: international tax considerations
These initiatives to tax the digital economy, irrespective of whether in the form of an equalisation tax or a 'virtual permanent establishment' concept, would represent a serious paradigm shift in international tax principles.
The various initiatives all aim to establish a taxable presence in the customers' residence country. Such a tax system would likely trigger fierce debate with non-EU jurisdictions, notably the US, as the tax position of the large US tech companies may be significantly impacted.
Recent OECD and EU reports show that increasing the tax take from digital platforms is difficult under the current international tax system. The BEPS deliverables are believed to not adequately address taxation of a digital business in the consumer (source) countries. In addition, current OECD transfer pricing rules do not adequately account for value that is created by gathering data of (free) users of search engines, social media platforms and other online behaviour.
Working on a fundamental revision of the international tax allocation rules to address this issue – e.g., by introducing a 'digital permanent establishment' – is apparently considered too time consuming and difficult, hence the temptation for to adopt a 'quick fix' like an equalisation tax. Given the growing digitalisation of many businesses, the introduction of a tax on digital activities would potentially have a very serious impact on the tax position of many enterprises operating internationally.
The ECOFIN members intend to seek consensus on one of the options to be outlined by the EU Commission. Recently, the EU Commission President Juncker expressed strong support for moving from unanimity to qualified majority voting on important tax matters (like corporate tax harmonisation). Whether there is political consensus for this idea is questionable, but it illustrates the EU Commission's ambition to drive the (corporate) tax agenda. If no consensus is reached, a leading group of Member States could launch a so-called “enhanced cooperation” procedure to progress faster.
It will be interesting to see what the impact of the EU initiatives will be on the OECD work on digital taxation. An OECD report on the subject of digital taxation is expected in the first half of 2018.
It is still too early to speculate whether there is sufficient political momentum for the introduction of an EU tax on digital companies, but the topic is clearly on the cards. We are closely monitoring the potential impact of these initiatives for your business and will keep you informed.