The EU has launched a public consultation on its proposals for making the taxation of the digital economy more effective and modern.
The European Commission says the current tax framework is no longer fit for purpose and “was designed in a pre-computer age”. The deadline for responses is January 3, 2018. All EU citizens, businesses and organisations are welcome to contribute.
The consultation comes after years of hand wringing over how to effectively tax digital businesses within the Eurozone. The EU’s stats show that, on average, digital businesses are subject to an effective tax rate of only 9%. When these business take advantage of the most beneficial tax regimes, they can bring down their tax burden down to effectively zero.
This is mainly due to the characteristics of digitalised business models, which rely heavily on intangible assets and benefit from tax incentives. Cross-border digital businesses are able to further minimise their taxes as their intangible assets are highly mobile.
“Nobody can deny it: our tax framework does not fit anymore with the development of the digital economy or with new business models,” said Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs.
“Member States want to tax the huge profits generated by digital economic activity in their country. We need a solution at EU level, bringing robust solutions for businesses and investors in the Single Market.”
A "Two-step approach"
Given the sheer size of the challenge, the commission has acknowledged that any meaningful reform will require a two-pronged approach: a targeted, short-term solution to be followed by a comprehensive, long-term one.
In the short term, the mooted options include:
- A tax on all untaxed, or insufficiently taxed, income generated from all internet-based business activities, including business-to-business and business-to-consumer, creditable against the corporate income tax or as a separate tax
- A stand-alone, gross-basis, final withholding tax on certain payments made to non-resident providers of goods and services ordered online
- A separate levy could be applied to all transactions concluded remotely with in-country customers where a non-resident entity has a significant economic presence
The more long-term, hefty solutions include a few intriguing proposals.
Most striking is the idea to establish a “unitary tax” that would be levied on companies’ global profits and divided between the EU countries where they operate.
Another suggestion is new rules for permanent establishments. Companies could be taxed when they have a digital presence in a country. Businesses like Amazon and Google would pay the corporation tax of the countries where their consumers are, not where their headquarters are located.
About Francois Badenhorst
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