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January 19, 2018

Is the European Commission missing the bigger picture regarding the taxation of the digital economy?

By Stephanie Wix

The European Commission’s public consultation on the taxation of the digital economy has been criticised by accountancy organisations for wasting time and efforts on the planning of temporary solutions when long term policies should have priority.

The consultation aimed to explore policies to achieve a fairer tax system, a level playing field across businesses, and support public revenue and growth in the Digital Single Market. Temporary solutions included taxing revenues from digital activities, taxing remote digital transactions with a non-resident entity, and applying a withholding tax to payments for non-resident providers of online goods and services.  

The Commission believes that the best way to address rapid digitalisation in the global economy is the implementation of a targeted temporary solution followed by a comprehensive long term solution.

However, accountancy bodies such as Accountancy Europe find that temporary measures could potentially become permanent and further fragment the international tax system. It not only takes considerable time and costs for both national legislators and businesses, but could also lead to increased double taxation, Accountancy Europe said.

In order to avoid the risk of double taxation there should be appropriate exemption mechanisms, suggested the Institute of Chartered Accountants in England and Wales (ICAEW). “Their suggestion to impose extra taxes may discourage innovation and risk taking, therefore, more analysis is needed to create detailed proposals that explore the chosen options,” the ICAEW response added.

The European Tax Adviser Federation (ETAF) added that it is difficult to comment on “so-called temporary solutions” as there is a lack of details over their design and enforcement.  “Given the time it takes to reach an agreement on temporary solutions we advise the Commission to undertake a cost effectiveness analysis on whether it should concentrate all its efforts on long term solutions on an international level,” stated ETAF’s response.

The consultation was conducted between 26 October 2017 and 3 January 2018 in the form of a multiple choice questionnaire. The potential long-term solutions in the consultation were:

  • Profit attribution rules established through a modified proposal for a common consolidated corporate tax base (CCCTB);
  • EU rules to capture digital activities of businesses in a stand-alone EU Directive;
  • The introduction of a corporate taxation destination-principle where the jurisdiction to tax is based on the consumers’ location;
  • A tax on a share of the world profit of digital companies (attributed to each country considering the percentage of earned revenue);
  • A system where tax rates applied and disclosed are an average of the tax rates where turnover is generated.

Economic and Financial Affairs, Taxation and Customs commissioner Pierre Moscovici said: "Our tax framework does not fit anymore with the development of the digital economy. Member States want to tax the huge profits generated by digital economic activity. We need a solution at EU level."

Yet the accountancy organisations disagreed arguing in favour of a global solution. ACCA senior manager for tax and business law Jason Piper said:

“This policy decision cannot be rushed and must be balanced against long term considerations. EU policy makers need to work with international bodies, such as the OECD, and with businesses themselves, to enhance the effectiveness of measures and avoid undesirable side effects.”

Similarly in their response to the consultation, Accountancy Europe argued that there should not be any measures introduced at EU level until after the OECD’s Task Force on the Digital Economy (a similar consultation released at the end of 2017) has reported its findings. Also, ETAF added that different definitions at EU and OECD level could add another layer of complexity for potential investors and discourage investment.

Further, the challenges identified in the consultation are not unique to digitalisation but are due to globalisation, Accountancy Europe and ETAF said in their response. “Globalisation has made it difficult to identify where value is created in the global supply chain and digitalisation has magnified current issues in tax system structures,” Accountancy Europe’s response read.

The results of the consultation and relevant proposals are expected in the first quarter of 2018.

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