Digital Economy: EU seeks fair taxation model
The European Commission launching a new EU agenda last week, to ensure the digital economy is taxed in a fair and growth-friendly way. The Communication, adopted by the Commission, set out the challenges Member States face when it comes to acting on what they define a “pressing issue” and outlines potential solutions to be explored.
"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 aim is to ensure a coherent EU approach to taxing the digital economy which supports the Commission's key priorities of completing the Digital Single Market and means a fair and effective tax system would apply to all companies. The move paves the way for a legislative proposal on EU rules for the taxation of profits in the digital economy, as confirmed by President Juncker in the 2017 State of the Union. Those rules could be set out as early as spring 2018.
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."
The EU believe the current tax framework does not fit with modern realities and the rules in place today were designed for traditional economies. Subsequently the current system does not 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. Britain is regarded as a good example of this as it prepares to leave the EU.
The first focus, the EU believe, 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. Member States should converge on a strong and ambitious EU position, so it: “can push for meaningful outcomes in the OECD report to the G20 on this issue next spring.” The Digital Summit in Tallinn will provide an ideal occasion for Member States to define this position at the highest political levels.
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."
In the absence of adequate global progress, the EU believes it should implement its own solutions to taxing the profits of digital economy companies.
The Communication outlines the Commission's long term strategy, as well as some of the short term solutions which have been discussed at EU and international level to date. The Common Consolidated Corporate Tax Base (CCCTB) in particular offers a good basis to address the key challenges and provide a sustainable, robust and fair framework for taxing all large businesses in the future. As this proposal is currently being discussed, digital taxation could easily be included in the scope of the final agreed rules. However, short term 'quick fixes' such as a targeted turnover tax and an EU-wide advertising tax will also be assessed.
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 Estonian Presidency will continue working on these issues with a view to having clear and ambitious Council conclusions by the end of the 2017. These conclusions should act as the EU contribution to international discussions on digital taxation, and lay the basis for future work in the Single Market. In the meantime, the Commission will continue to analyse the policy options and consult with relevant stakeholders and industry representatives.
"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."
The Commission awaits the OECD's report to the G20 in spring 2018, which may set out appropriate and meaningful 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.
The EU has made clear that, even this is not the case, they will be ready to present an original legislative proposal to ensure a fair, effective and competitive tax framework for the Digital Single Market.