Nevertheless, while the world’s 20th century tax systems have struggled to keep pace with developments in our 21st century economy, the OECD said that the digital economy does not pose unique tax issues, although certain of its characteristics may exacerbate BEPS risks.
This implies that the challenges posed by digital business models, and companies operating almost entirely online, can be dealt with by adapting existing tax rules, rather than inventing new ones.
What’s more, the OECD has emphasized throughout its BEPS work that such measures should be introduced in a coordinated, multilateral manner, rather than by jurisdictions making the rules up as they go along.
Judging by the release of the European Commission’s new digital tax agenda, it seems the EU doesn’t agree.
The EC’s Digital Tax Agenda
On September 21, the Commission published its vision for the "fair taxation" of the digital economy, which emerged against a backdrop of public and political outrage about the way big internet companies legally minimize their taxes.
The plan included options for new types of taxes to target digitalized companies, to ensure that they pay levels of tax commensurate with the volume of their sales in their main markets.
Among the options posited in the Communication were:
- An equalization tax on the turnover of digitalized companies. This would apply to all "untaxed or insufficiently taxed" income generated from internet-based business activities, creditable against corporate tax or as a separate tax;
- A withholding tax on digital transactions. This would operate as a standalone gross-basis final withholding tax on certain payments made to non-resident providers of goods and services ordered online;
- A levy on revenues generated from the provision of digital services or advertising activity. This could be applied to all transactions concluded remotely with in-country customers where a non-resident entity has a significant economic presence.
Reaction To The Digital Agenda
Unsurprisingly, much of the business community has reacted negatively to the proposals, warning that they pre-empt the OECD’s ongoing work in this area, could stifle innovation and threaten to harm EU competitiveness.
AmCham EU, the American Chamber of Commerce for the European Union, for example, warned that unilateral action by the EU “would seriously undermine international efforts to address tax issues.”
It also said that a turnover tax could “substantially reduce the amount of company profits available for investment and reinvestment.”
Similarly, Business Europe argued that the proposal “would violate the long-standing international principle of taxing corporate profits,” and fail to respect “members states’ competences to set their own tax policies.”
Even EU member states are wary of these ideas, with ministers in Ireland, Luxembourg and Malta having spoken out against them.
Irish Finance Minister Paschal Donohoe said in a recent speech that separate tax rules for the digital economy risk double taxation and greater uncertainty and called for a “global solution” to the problem.
Luxembourg's Finance Minister, Pierre Gramegna, cautioned that such taxes may cause digital firms to “circumvent Europe” altogether, concerned the agenda may look like a political attack on US companies.
Malta's Minister for Finance, Edward Scicluna, has also recently emphasized the importance of not allowing “unilateral EU measures to end up damaging EU companies.”
The Next Steps
The European Commission hopes to publish more detailed proposals next spring, with a view to securing an agreement from the EU Council – the body representing the member states - by the end of 2018.
However, given how the proposals have been received by some member states, that target looks highly optimistic.