Europe takes a stand for fairer taxation of digital companies
Gone are the days of hard borders, tangible assets and brick-and-mortar marketplaces.
Instead, intangible assets bring in revenue from one side of the globe to companies based in an entirely different timezone.
For example, a music application or social media platform based in the US depends on revenue from its European customers who pay for streaming services or advertising, respectively.
Today, in both instances, those companies are required to pay no taxes in Europe because they have no physical presence here.
EU law has struggled to keep up with the shapeshifting nature of digital companies. European legislature is the tortoise, and the digital economy is the hare. Not only does the tortoise want to win the race, but it wants to do so while keeping the hare happy enough to stick around.
Therefore, any changes to the taxation of digital companies will ideally happen at the international level. The European Commission hopes this can be achieved at the G20 summit in 2018.
Updating legal definitions for the digital age
On September 21, the Commission published a briefing stressing the importance of redefining the taxation of digital companies in order to preserve the digital single market, a need they have highlighted before as part of Juncker’s fair taxation agenda.
Existing legislation is simply not equipped for modern business. Let’s take the definition of permanent establishment, which requires a physical presence — a far too limited description at a time when substantial economic presence requires no physical presence at all.
Another example is transfer pricing: The value of traditional goods and services transferred within groups are more easily calculated than the intangible ‘goods and services’ that have replaced them — such as intellectual property or data.
Weighing the ‘equalization tax’
On the heels of losing a case against Google for an alleged €1.1 billion in owed taxes, France particularly wants to prevent future recurrences. According to the Commission, domestic digitalized business models pay an effective tax rate of nine percent. That’s under half of what traditional business models contribute.
France, Germany, Spain and Italy released a memo suggesting an equalization tax. They propose taxing the revenue of digital companies rather than the profit. Many see this as a quick and temporary fix that could hinder the creation of a long-term solution.
At the informal ECOFIN meeting in Tallinn earlier this month, relevant ministers from the EU member states agreed on the urgency of reaching an understanding on an international taxation path by December.
Striving for unity on Taxation
The biggest challenge faced by proponents of digital taxation reform is that support must be unanimous. One hole in the tax scheme and digital companies will slip away to whatever country offers up the most advantageous system.
Luxembourg’s Minister of Finance Pierre Gramegna communicated an openness to discussing new taxation rules and a potential equalization tax. Simultaneously, he warned of the risks involved if the international community is not on board. The Commission also reminded that any changes should be accepted on an EU level until it can be pushed globally. For this to happen, all 28 member states must agree.
No fully coherent plan for fairer taxation of digital companies has been proposed. However, the wheels are in motion in a way we have not yet seen in Europe. Issues, such as double taxation and dated definitions still need attention, but the the Commission and the largest European economies have sent a clear message: the current taxation of digital companies is simply not good enough.
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