Taxation of digital economies in the EU

On 29 September 2017, during the Tallinn Digital Summit, the EU Council of Economy and Finance Ministers (Ecofin) discussed the supposedly insufficient taxation of companies active in the “digital economy”. In preparation to this meeting the European Commission (Commission) published on 21 September 2017 its “Communication” with options to create a fair and efficient tax system in the EU on profits generated by the Digital Single Market. The Communication was meant to provide the Member States with a basis for further political discussions during the Tallinn Digital Summit. A report summarising the meeting in Tallinn is expected in the coming weeks. The aim is to achieve consensus during the Ecofin meeting in December 2017, followed by a legislative proposal in the first half of 2018.

Background

The topic of “taxation of digital businesses” has also been addressed by the OECD in its Base Erosion and Profit Shifting Report (Action Plan 1). In its report, the OECD mentioned that the digital economy is growing strong and increasingly becoming an economy itself. In their view, the international taxation systems should be amended in order to ensure a sufficient taxation of these businesses. 

The Commission is of the opinion that the international tax rules, which have originally been designed for traditional businesses with physical presence, are no longer considered suitable for modern businesses in the increasing digital economy. Companies like Google, Apple, Facebook and Amazon (recently referred to as ‘Gafa’) rely heavily on hard-to-value intangible assets, data and automation, that facilitate online trading across borders with no physical presence.

Based on current international taxation rules, profits of multinational groups are attributed to the different countries based on an analysis of the functions, assets and risks within the value chain of the group. In the digital economy typically intangible assets are the main value driver. According to OECD and the Commission, identifying and valuing intangible assets and their contribution to value creation requires a different methodology, and should lead to a more fair and efficient taxation of digital businesses.

Proposals by the Commission

EU Finance Ministers agreed to reach a common understanding on the taxation of digital economies by December 2017. In order to reach this, the options outlined in the Commission’s Communication document will be used as a starting point.

The Communication document of the Commission includes long as well as short term solutions. For the long term, the Commission suggests to reform the international taxation rules on permanent establishments, transfer pricing and profit attribution applicable to digital technologies by including the concept of a “virtual” or “digital” permanent establishment. These amendments (if accepted) should then be included in the EU Common Consolidated Corporate Tax Base (CCCTB) proposal which currently is still being negotiated.

For the short term the Communication document includes the following options:

• Equalisation tax on turnover of digitalised companies – This option, initiated by France and embraced by Germany, Italy and Spain, concerns a taxation on all untaxed or insufficiently taxed income generated from all digital 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 online goods and services.
• Levy on revenues generated from the provision of digital services or advertising activity – A separate levy to all transactions concluded remotely with local customers where a non-resident entity has a significant economic presence.

Next steps

The Communication document intends to provide the Ecofin members a basis for further political discussions on the taxation of digital economies. It is aimed to reach a common understanding in December 2017, followed by a legislative proposal which is expected during Spring 2018. In April 2018, the OECD will present its interim report on the taxation of the digital economy to the G20.

Comments

Question is how both the long and short term solutions of the Commission relate to double tax treaties, State aid rules and fundamental freedoms rules. These potential issues have been admitted by the Commission and will be further examined.

At the moment, the view of the Dutch government on the proposed solutions is not clear. It seems clear, however, that the Netherlands is in favor of a coordinated EU approach. We will monitor the developments closely and inform you accordingly.