A group of experts recently presented the European Commission a final report discussing how the EU should tax the digital economy. The group advises that EU tax policy must focus on digital economy tax issues. The report continues the emphasis in the EU and the Organisation for Economic Co-operation and Development (OECD) on how countries can maximise tax revenue in a part of the world that has a unified economy but diverse taxing authorities.
The report acknowledges that the rapidly growing digital sector presents special tax challenges for various countries, which need to adapt their tax systems to the online economy. In looking at the rapid spread of digitalisation, the report compares it to the spread of electrification in the late 19th and early 20th centuries, which produced a similar growth in labour productivity.
The group was set up in October 2013 by the European Commission to develop a comprehensive EU position on digital economy tax issues. In the course of its work, it looked at a variety of digital trends, from cloud technology and Big Data to advanced robotics and the internet of things.
The group came to three conclusions:
- The digital economy should not have its own special tax rules – instead, existing tax principles should be adapted so digital companies are treated similarly to other companies;
- A simple, stable and predictable tax regime is necessary for the full potential of digital technology to be realised and for small and medium-size enterprises to be able to access Europe’s single market;
- Tax incentives and credits should be treated with caution and must be justified by a need to correct a market failure.
The report endorsed the destination principle for VAT – that is, that VAT should be collected at the place of consumption. It also endorsed the OECD and G20 efforts to combat tax avoidance via their base erosion and profit-shifting project.
Finally, the group recommended three specific areas that should be given high priority:
- Countering harmful tax practices, especially in the areas of hybrid mismatches, controlled foreign corporations, and treaty shopping;
- Reviewing transfer pricing rules; and
- Evaluating taxable nexus and permanent establishment criteria.
Regarding taxable nexus, the group recommends a review of the way concepts relevant to establishing a taxable connection with a country are defined and applied. The group also says that there is no convincing argument why electronic data collection should create a taxable presence in a country.
The European Commission must now consider the recommendations in the report and decide what digital tax policy course it wants to pursue.
—Alistair M. Nevius (firstname.lastname@example.org) is CGMA Magazine’s editor-in-chief, tax.