by Julie Martin
The European Commission today released a communication concluding that the amount corporate tax paid by digital firms is insufficient because of outdated international tax rules and proposing both long- and short-term reform fixes to the international tax system.
“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,” said Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, presenting the paper.
The document was prepared in advance of the EU Digital Summit, to be held September 29 in Tallinn, Estonia, where EU ministers will discuss the taxation of digital firms.
The paper offers only a very general discussion of long-term solutions for taxing the digital economy.
Such options could involve reform of international tax rules on permanent establishment, transfer pricing, and profit attribution applicable to digital technologies, the paper states.
The current EU proposal for a common consolidated corporate tax base (CCCTB) could be enhanced to effectively capture digital actives, the paper notes.
Acknowledging that long-term solutions will likely take a lot of time to put in place, the communication includes three options for a short-term solution.
The paper presents as an option an equalization tax on the turnover of digitalized companies. At least half the EU nations have already expressed an interest in developing such a tax as a short-term fix.
The paper characterized the equalization tax as a tax on all untaxed or insufficiently taxed income generated from all internet-based business activities, including business-to-business and business-to-consumer.
The tax would be creditable against the corporate income tax or assessed as a separate tax, the Commission paper states.
A second option would be a withholding tax on digital transactions. This would be a standalone gross-basis final withholding tax on certain payments made to non-resident providers of goods and services ordered online, the paper says.
The third option is for a separate levy on revenues generated from the provision of digital services or advertising activity. This tax would be applied to all transactions concluded remotely with in-country customers where a non-resident entity has a significant economic presence, the Commission said.
The Commission said that each of the options must be examined for compatibility with double-taxation treaties, State aid rules, fundamental freedoms, and free trade agreements and WTO rules.
The Estonian Presidency seeks EU consensus on a way forward for the taxation of the digital economy by December so the EU can speak with a unified voice in discussions with the OECD on global solution.
Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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