The ongoing digitalisation of our economies has brought positive effects for our societies and for our economies, such as cheaper, more powerful and widely standardised technologies.
At the same time, this process is creating new challenges, not least to the international tax system, which can lead to distortions and tax uncertainty. A reform of the international tax system is needed to achieve a fair and effective tax system in the long run. In the meantime, however, we need an EU solution via a modern and stable regulatory and tax framework.
“There should be no more room for low or no taxation, market distortions, and tax uncertainty - that’s what the European Parliament is now fighting for”
Digital companies should have to pay tax on their profits without exception; only if all profits are taxed equally will we see fair competition in a global economy. Ultimately, the aim is to establish a level playing field between traditional and digital business models. A better, fairer tax system is also in the interest of the digital economy.
Since 2013, there has been talk at G20 level over the Base Erosion and Profit Shifting (BEPS) rules for the tax challenges arising from digital deals. However, due to a lack of consensus, countries have not been able to make progress.
Since then, the OECD/G20 Inclusive Framework has been developing the existing ‘Two-Pillar approach’. Members have agreed on this, providing a solid foundation for developing a global, consensus-based solution to the tax challenges of the digitalisation of the economy. Recently, due to the Coronavirus crisis, this discussion has gained considerable momentum, particularly in the European Union.
The European Parliament, with the INI (own initiative procedure) report on “Digital Taxation: OECD negotiations, tax residency of digital companies and a possible European Digital Tax”, was voted on in plenary last month. This has highlighted that the EU should strongly support the ongoing negotiations in the OECD, which are aimed at achieving a global and consensus-based solution for reforming the international tax system by mid-2021.
This is now becoming increasingly pressing, given the recent change in the US administration’s approach, which is closer to the European approach and makes a global agreement a real possibility. The OECD solution is the one we need to ultimately achieve; however, we don’t know when this process will be finalised and then implemented - it could take years.
In this regard, it important that the Commission publishes its proposal for a digital levy soon. This proposal would consider a number of issues. First, a common EU solution for taxation of the digital economy in the EU, enabling Member States to tax the profits made in their territory, even if a company does not have a physical presence in the country. This would ensure that digital businesses contribute to national finances at the same level as traditional companies.
To achieve this, the Member States should amend their Double Taxation Treaties with third countries so that the same rules apply to EU and non-EU companies. Second, a new interim tax for digital services, which would apply to the most critical loopholes in the taxation of digital activities, should be adopted. The measure would ensure that those activities, which are not currently taxed efficiently, would begin generating immediate revenues for Member States.
The EU digital levy would not compete with, or be presented as an alternative to, the future international tax framework. Rather, it would be a separate, complementary instrument. Moreover, a solution at EU level is welcome because it might discourage Member States from seeking special national solutions.
“The OECD solution is the one we need to ultimately achieve; however, we don’t know when this process will be finalised and then implemented - it could take years”
This would increase the risk of fragmentation of the single market, something that is already being seen in some countries, where temporary national digital sales taxes (DSTs) - which taxes the revenues of digital companies - are being introduced.
In a globalised world, we Europeans need to defend our sovereignty together, with a common approach. In the European Union, our digital single market only really works well if different digital taxes are not introduced everywhere.
However, it is not only a problem at the EU level; it is time for legislators all over the world to shape a clear and comprehensive digital policy by including a fair, clear and equal digital tax system for everyone and between all economic sectors. There should be no more room for low or no taxation, market distortions, and tax uncertainty - that’s what the European Parliament is now fighting for.