A report, released by the European Commission on May 28, concludes that a special tax regime should not be adopted for the digital economy; rather, modification of current VAT, corporate tax, and transfer pricing rules are needed to respond to the digitization of the economy.
The report, drafted by group of seven independent tax experts led by Victor Gaspar, Special Advisor to the Banco de Portugal, responds to a Commission request for an examination of issues related to taxing the digital economy in the EU. The report will be used by the Commission to assist in forming policy recommendations.
The report’s conclusion that digital economy does not require a separate tax regime is consistent with a March 24 OECD draft report on the tax challenges of the digital economy, released in connection with the OECD base erosion and profit shifting (BEPS) initiative. The OECD draft concludes that “ring-fencing the digital economy as a separate sector and applying tax rules on that basis would be neither appropriate nor feasible.”
The EU report also concluded that collection of data alone should not create a taxable presence in a country, though a review of permanent establishment concepts should be undertaken to take account of the new digital economy. The review should focus on remote contracting and the distinction between a dependent agent and a commissionaire, and on the definition of the preparatory or auxiliary activities exception, the expert group said.
“VAT has a significant role to play in ensuring that appropriate tax revenue accrue from business operating in the digital economy,” the group said. The paper recommends expansion of a destination-based VAT system for digital services to all goods and services and the removal of the VAT exemption for small consignments from non-EU countries.
The report recommends that member states take common positions on the OECD BEPS project to ensure a better outcome for the EU. Priority areas for the EU within the BEPS project are countering harmful tax practices, revising transfer pricing rules, and reviewing the concepts for defining and applying taxable presence, the report says.
Moreover, the report states that a review of transfer pricing standards should be undertaken to to enable countries to ignore intercompany transfers of intellectual property that lack economic substance or that have tax benefit as a main purpose. The feasabity of disregarding contractual allocation of risks for transfer pricing should also be explored, the report says. Report, Press Release
