The European Commission launch on 21 September 2017 a new EU agenda to ensure that the digital economy is taxed in a fair and growth-friendly way. Commission adopted a Communication which sets out the challenges Member States currently face when it comes to acting on this pressing issue and outlines possible solutions to be explored.
The aim is to ensure a coherent EU approach to taxing the digital economy that supports the Commission’s key priorities of completing the Digital Single Market and ensuring the fair and effective taxation of all companies. Today’s Communication paves the way for a legislative proposal on EU rules for the taxation of profits in the digital economy. Those rules could be set out as early as spring 2018. Today’s paper should also feed into international work in this area, notably in the G20 and the OECD.
Andrus Ansip, Vice-President for the Digital Single Market said: “Modern taxation rules are essential to leverage the full potential of the EU’s Digital Single Market and to encourage innovation and growth. This means having a modern and sustainable tax framework which provides legal certainty, growth-friendly incentives and a level playing field for all businesses. The EU continues to push for a comprehensive revision of global tax rules to meet the new realities.”
Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue said: „There is broad agreement that the growing digitalisation of the economy creates huge economic opportunities. At the same time, our tax systems should evolve to capture new business models while being fair, efficient and future-proof. It’s also a question of sustainability of our tax revenues as traditional tax sources come under strain. Not least, it’s about maintaining the integrity of the Single Market and avoiding fragmentation by finding common solutions to global challenges.”
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs added: „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 current tax framework does not fit with modern realities. The tax rules in place today 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.
The first focus should be on pushing for a fundamental reform of international tax rules, which would ensure a better link between how value is created and where it is taxed.
In the absence of adequate global progress, the EU should implement its own solutions to taxing the profits of digital economy companies. Today’s Communication outlines the Commission’s long term strategy, as well as some of the short term solutions that have been discussed at EU and international level so far.
Some alternative options for shorter-term solutions, EC proposal
Equalisation tax on turnover of digitalised companies – A tax on all untaxed or insufficiently taxed income generated from all internet-based business activities, including business-to-business and business-to-consumer, creditable against the corporate income tax or as a separate tax.
Withholding tax on digital transactions – A standalone gross-basis final withholding tax on certain payments made to non-resident providers of goods and services ordered online.
Levy on revenues generated from the provision of digital services or advertising activity – A separate levy could be applied to all transactions concluded remotely with in-country customers where a non-resident entity has a significant economic presence.
Questions and Answers on the Communication on a Fair and Efficient Tax System in the EU for the Digital Single Market MEMO
COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL A Fair and Efficient Tax System in the European Union for the Digital Single Market PDF EN