Taxation of digital economy: OECD and European Council updates
OECD’s position on taxation of the digital economy
The OECD Secretary General, Angel Gurria, and the Director of the OECD Centre for Tax Policy, Pascal Saint-Amans, have voiced strong doubts about the possibility to ring-fence the digital economy for tax purposes and warned for the potential adverse consequences of countries taking unilateral measures. The digitalisation of the whole economy makes it indeed difficult to target certain companies only for corporate tax purposes.
Location of value creation in a digitalised world
Gurria stressed the need to address fundamental questions such as defining what value creation means in a digitalised world and where value creation takes place. He hinted the OECD would seek a solution applicable to the whole economy, based on updating existing concepts such as the permanent establishment concept.
Is ring-fencing the digital economy an option?
Saint-Amans noted that the entire economy is digitising, and that we cannot really tax a few companies without taking into account the entire sector. He criticised the ‘equalisation tax’ on the turnover of digital companies advocated by France at EU level. Such measure entails risks of double taxation, as it would apply to turnover instead of profits, and could damage innovation and SMEs more than the targeted (mainly US) tech giants. Saint-Amans mentioned the option of increasing the VAT on digital services, as VAT is a ‘destination-based’ tax, i.e., levied in the consumer’s country.
European Council prioritizes alignment with OECD work
The final conclusions of the European Council meeting of 19 October stated that successfully building a Digital Europe requires an effective and fair taxation system fit for the digital era. The European Council supports achieving “a global level playing field in line with the work currently underway at the OECD.” Notably, in its conclusions, the European Council did not refer to the French-led proposal of introducing an equalisation levy, nor to any of the other taxes listed in the European Commission’s communication of 21 September.
Loyens & Loeff’s submission with the OECD
The OECD will issue a report on the topic in April 2018. A consultation of stakeholders closed on 13 October 2017, and a discussion forum will take place on 1 November 2017. The ideas we conveyed in our submission largely reflect the concerns expressed by Mr Gurria and Mr Saint-Amans. We think that ring-fencing the digital economy would face unsurmountable technical problems and could lead to arbitrary taxation and market distortions.