Taxation of the digital economy: further developments

Both the EU Commission and the Organisation for Economic Cooperation and Development (OECD) have issued further proposals regarding the taxation of the digital economy. The EU Commission has launched a new EU agenda outlining possible approaches, whilst the OECD has released a request for input on further work regarding the challenges of the digital economy. It is expected that EU Member States will further discuss the issues at the Tallinn Digital Summit on 29 September 2017 with a view to producing a co-ordinated EU position to take forward to the OECD and G20.

Background

The tax treatment of the digital economy was specifically addressed by the OECD in Action Point 1 of its Base Erosion and Profit Shifting (BEPS) Project. In its final Report, the OECD essentially concluded that, because the digital economy is increasingly becoming the economy itself, it would not be feasible to ring-fence the digital economy from the rest of the economy for tax purposes and the better approach was to analyse existing structures utilised by multi-national companies and the key aspects of the digital economy that exacerbate tax challenges or BEPS concerns.

Nevertheless, there was broad agreement that the OECD and G20 countries should monitor developments to determine whether further work on the more directed measures should be carried out, recognising, in particular, that issues relating to tax nexus and tax treatment of data remained.

Most recently, EU Finance Ministers agreed to progress proposals to address the tax treatment of companies operating in the digital economy, see “Taxation of the digital economy”.

EU Commission

The EU Commission has now released a communication, “A Fair and Efficient Tax System in the European Union for the Digital Single Market”, seeking to influence developments in relation to the taxation of the digital economy and ensure that the EU acts in a co-ordinated manner.

The report recognises that, ideally, a global solution should be found which consists of a fundamental reform of international tax rules. This would require reform of the international tax rules on permanent establishments (PE), transfer pricing and profit attribution. The EU Commission advocates that Member States should seek to agree a position such that the EU is in a strong position to influence and shape developments internationally at the OECD and G20 level.

However, the communication recognises that it may well take a significant amount of time to reach international consensus. Therefore, in the absence of adequate global progress, the Commission suggests that the EU should be prepared to go it alone and implement its own solutions to taxing the profits of digital economy companies. Perhaps unsurprisingly, the Commission suggests that, in the longer term, the Common Consolidated Corporate Tax Base (CCCTB) offers the best framework to address these issues within the EU. In the short term, the Commission suggests that a number of options could be considered, such as:

• an equalisation tax on the turnover of digital companies, possibly as a separate tax or creditable against corporate income tax
• a withholding tax on digital transactions provided by non-resident providers of online goods and services, and
• a Levy on revenues generated from the provision of digital services or advertising.

Both the short term and any longer term solution raise significant issues. In particular, the Commission admits that there are real questions over the compatibility of such approaches with the fundamental freedoms, State Aid rules, double taxation treaties and international commitments under free trade agreements and WTO rules. These challenges should not be underestimated.

OECD

Meanwhile, the OECD has now released a “Request for input on work regarding the tax challenges of the digitalised economy”. The OECD notes that a number of jurisdictions have begun taking steps towards the implementation of unilateral measures aimed at taxing digitised activities. Against this background, it is clearly important for the OECD to revisit the broader issue of taxation of the digital economy.

The request outlines the background on the work regarding the tax challenges and invites comments. In particular, comments are requested on a number of potential options, which overlap with those discussed by the Commission, including:

• the introduction of a tax nexus concept of “significant economic presence”
• withholding taxes on digital transactions, and
• a digital “equalisation levy” (tax on turnover).

Comments should be submitted by 13 October 2017 to TFED@oecd.org

Comment

The case for further action in relation to the tax treatment of businesses operating predominantly digitally and the profits of such digital activities appears to be growing rapidly. Both the OECD and the EU Commission are now actively working on potential measures to create a more level playing field between digital businesses and their “bricks and mortar” equivalents, as well as ensuring that tax revenues are shared fairly between affected jurisdictions.

In the short term, EU leaders are expected to discuss strategic options on Friday 29 September 2017 in Tallinn. If general agreement can be reached on the approach to take, this can be expected to significantly influence work on the OECD’s interim report on the taxation of the digital economy, which is expected to be put forward to the G20 in early 2018. Whilst an internationally co-ordinated approach is clearly preferable, there now appears to be significant appetite amongst some of the major EU Member States, including Germany and France, for an interim EU-only approach should developments in the absence of adequate global progress.

However, it should not be forgotten that changing the international tax landscape is an extremely difficult task. And this task may be made far more difficult should the USA, host to many of the largest companies likely to be affected, be unwilling to engage in the process.

Update

For the conclusions adopted by the European Council at its 05 December 2017 meeting on taking forward developments in the international tax treatment of the digital economy, see “Taxation of the digital economy: ECOFIN conclusions”.