EU plans to debate proposals for digital tax

The EU is moving ahead with plans for a new digital taxation rate for multinational companies with proposals due to be debated in the European parliament

MEPs are calling for a new and fairer allocation of taxing rights for highly digitalised multinationals and a revision of the traditional concept of permanent establishment, as it fails to cover the digitalised economy.

On average, digital businesses face an effective tax rate of only 9.5%, as opposed to 23.2% for traditional business models across the EU.

The revenue from the introduction of an EU digital tax, according to the EU documents, could raise an estimated several billions of euro to several tens of billions of euro depending on a range of factors including the exact definition of the taxable base, the taxable entity, the place of taxation, the calculation and the rate of tax, as well as economic growth rates in the sectors concerned.

Users of online platforms and consumers of digital services are now central elements in value creation by highly digitalised businesses, and that they cannot be shifted outside a jurisdiction in the same way as capital and labour, and should therefore be taken into account when defining a new tax nexus to provide an effective remedy against aggressive tax planning and tax avoidance, the EU stated.

While the EU is prepared to introduce a digital tax across only member states, its preferred option is for an international agreement aiming for a fair and effective tax system and welcomes the efforts in the G20/OECD to reach a global consensus on a multilateral reform of the international tax system to address the challenges of continued profit shifting and the digitalised economy.

It is calling for a swift agreement by mid-2021 in an inclusive negotiating process after original plans to finalise a global digital tax were delayed due to the covid-19 pandemic. The EU is keen to settle the issue by June this year and welcomed the recent declaration of the new US administration that it will re-engage actively in OECD negotiations with a view to achieving an agreement and abandon the ‘safe harbour’ concept.

If international agreement cannot be reached, the proposals state that ‘the EU should have a fall-back position and stand ready to roll out its own proposal for taxing the digital economy by the end of 2021, especially as the OECD proposals apply only to a small group of companies and may not be sufficient’.

The EU proposals take into account that a narrow definition of the problems would result in targeted rules being designed only for certain businesses; and points out that transfer prices, the definition of permanent establishment and taxation gaps resulting from various overly complex tax systems must be reviewed, in particular with regard to double taxation agreements.

Any new taxation on the digital economy would be based on a system of taxing profits, not revenues, the EU proposals state. It also highlights the need to address the under-taxation of the digitalised economy; stressing the need to take into account the inherent mobility of highly digitalised multinationals, in particular with a view to value creation, and to ensure a fair distribution of taxing rights among all countries where they pursue economic activity and value creation, including research and development (R&D). This would also require some existing double taxation agreements which can prevent the fair allocation of taxing right to be updated.

There are concerns among EU officials that EU digital companies that are headquartered in an EU member state and are subject to EU corporate taxes are at a disadvantage compared to foreign companies that have no ‘physical presence’ in any member state, and can therefore avoid paying corporate taxes in the EU even if they operate with European users. This means it is important ‘to create a level playing field for providers of traditional services and automated digitalised services, as well as consumer-facing businesses in the EU, by ensuring that the latter are taxed where they make profits and at a fair rate’.

During the debate on Wednesday [28 April], MEP Andreas Schwab (EPP, DE), one of the co-rapporteurs said: ‘We have had a big problem in the last few years with digital services because they have been taxed more lightly than traditional ones. This problem grew further during the COVID-19 pandemic. Equal treatment in taxation is not only fair but it is also necessary for fair competition. This resolution provides clear and simple guidelines for how to break away from taxing digital and traditional businesses differently.’

The resolution was adopted 549 votes in favour, 70 against and 75 abstentions.

EU report on digital taxation: OECD negotiations, tax residency of digital companies and a possible European digital tax



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