EU and OECD propose new rules to raise tax on digital economy

The EU has stepped up its effort to ensure all companies pay fair tax, with the proposal for news rules designed to ensure that digital business activities are taxed in a fair and growth-friendly way in Europe. Digital companies currently have an average effective tax rate half that of the traditional economy in the EU. The OECD also announced that more than 110 countries and jurisdictions have agreed to review two key concepts of the international tax system, responding to a mandate from the G20 Finance Ministers to work on the implications of digitalisation for taxation. The OECD said members of the OECD/G20 Inclusive Framework on BEPS will work towards a consensus-based solution by 2020, as set out in its Interim Report on the Tax Challenges Arising from Digitalisation that was published on 16 March. The Interim Report was presented by OECD secretary general Angel Gurría to the G20 Finance Ministers at their meeting on 19-20 March in Buenos Aires, Argentina. The European Commission has also delivered on its pledge to ensure that the EU's common EU list of non-cooperative tax jurisdictions is backed up by effective countermeasures through the adoption of guidelines that it says mark the first step in stopping the transit of EU funds through non-cooperative tax jurisdictions. The EU said that its proposed measures for the taxation of digital businesses would make the region a “global leader” in designing tax laws fit for the modern economy and the digital age. It said the recent boom in digital businesses, such as social media companies, collaborative platforms and online content providers, has made a great contribution to economic growth in the EU. But it points out that current tax rules were not designed to cater for those companies that are global, virtual or have little or no physical presence. The EU said the change has been dramatic. Nine of the world's top 20 companies by market capitalisation are now digital, compared with only one in 20 ten years ago. “The challenge is to make the most of this trend, while ensuring that digital companies also contribute their fair share of tax. If not, there is a real risk to member state public revenues,” said the EU. The Commission said it hopes that two distinct legislative proposals will lead to a fairer taxation of digital activities in the EU. The first initiative aims to reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels. This forms the Commission's preferred long-term solution. The second proposal responds to calls from several member states for an interim tax, which covers the main digital activities that currently escape tax altogether in the EU. Valdis Dombrovskis, vice-president for the euro and social dialogue, said: "Digitalisation brings countless benefits and opportunities. But it also requires adjustments to our traditional rules and systems. We would prefer rules agreed at the global level, including at the OECD. But the amount of profits currently going untaxed is unacceptable. We need to urgently bring our tax rules into the 21st century by putting in place a new comprehensive and future-proof solution." Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs, added: “The digital economy is a major opportunity for Europe and Europe is a huge source of revenues for digital firms. But this win-win situation raises legal and fiscal concerns. Our pre-internet rules do not allow our member states to tax digital companies operating in Europe when they have little or no physical presence here. This represents an ever-bigger black hole for member states, because the tax base is being eroded. That's why we're bringing forward a new legal standard, as well an interim tax for digital activities.” The new guidelines on the EU's list of non-cooperative tax jurisdictions mark the first step in stopping the transit of EU funds through non-cooperative tax jurisdictions, and will ensure that EU funds do not inadvertently contribute to global tax avoidance, according to the EC. “Today's guidelines should guarantee in particular that EU external development and investment funds cannot be channelled or transited through entities in countries on the EU's common list,” stated the EC. The first ever list was agreed and published in December 2017 and is updated on a continuous basis. The new requirements seek to align the EU's objective of tackling tax avoidance at the global level, with the rules governing the use of EU funds by International Financial Institutions such as the European Investment Bank, development financial institutions – including the European Fund for Sustainable Development – and other eligible counterparties. On 13 March, the European Council removed Bahrain, the Marshall Islands and Saint Lucia from the list and added the Bahamas, Saint Kitts and Nevis and the US Virgin Islands.

EU and OECD propose new rules to raise tax on digital economy

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