The European Commission has announced that it is launching a new EU agenda to ensure that the ‘digital economy’ is taxed in a fair and growth-friendly way. The concerns that they are seeking to address result from a tax framework that has struggled to keep pace with modern realities. The right of a jurisdiction to tax profits has traditionally relied on a taxpayer having physical presence in that jurisdiction. The nebulous nature of the ‘digital economy’ however, has a borderless character that creates complexity for taxing jurisdictions and opportunities for companies to minimise physical presence (and therefore its tax base) in a country whilst continuing to do business there. According to the Commission, the effective tax rate of digital companies in the EU is estimated to be half that of traditional companies – and often much less.
The Commission has said that in the absence of adequate global progress, the EU should implement its own solutions to taxing the profits of digital companies. Their preferred approach for doing so is to include the ‘digital economy’ within the proposals of the ‘Common Consolidated Corporate Tax Base’ (CCCTB) – a long-term strategy currently being discussed by member states which could see the introduction of a wholly new definition of ‘permanent establishment’, the threshold for determining whether an enterprise of one country can be subjected to tax by another country on its business activities there. Multinational businesses will be concerned that any move towards a concept of ‘virtual permanent establishment’ not requiring physical presence could trigger tax obligations in multiple countries leading to unmanageable compliance obligations, double taxation and increased costs. Other short term measures being considered include ‘targeted turnover tax’ and withholding taxes on digital transactions.
The Commission have an ambitious timescale with conclusions for the initiative hoped for by the end of the year. These conclusions will form the EU’s contribution to international discussions on digital taxation, and lay the basis for future work in the single market.
Whilst Francis Clark Tax Consultancy are supportive of initiatives that ensure tax is paid wherever value is created, we share the view of the ‘Chartered Institute of Taxation’ that there are reforms already underway and agreed through consensus by countries which attempt to address the taxation of all multinational companies, including those usually thought of as ‘digital’. We urge governments to hold their nerve and make sure these agreed reforms work and have a wide take up before attempting further fixes that risk upsetting attempts at global solutions. The Commission should not rush through any measures that are unpractical and cannot easily be implemented or discourage doing business in the EU.
The full EC proposals and the CIOT’s response can be viewed at the followings links: