Public consultation European Commission regarding the fair taxation of the digital economy
On 3 January 2018, the public consultation launched by the European Commission regarding the fair taxation of the digital economy (the Consultation) closed. Now that the consultation period is over, the European Commission will prepare a report summarizing the responses. The contributions and the report will be published on DG TAXUD's webpage in the first quarter of 2018.
Relevance of the Consultation for businesses
The discussion is aimed at taxation of the digital economy. However, it is argued that the digital economy cannot be ring-fenced. Furthermore, some of the measures considered by the Commission regard very fundamental aspects of international taxation. Therefore, it cannot be ruled out that any changes introduced will also have an impact on businesses outside the digital economy.
Loyens & Loeff’s response to the Consultation
Loyens & Loeff submitted a position paper in response to the Commission’s request for input. Our full position paper can be downloaded here. The position paper for the Commission includes, as an annex, our response to the public consultation launched by the OECD in 2017. On our website, we published a summary of our response to the OECD.
In summary, we noted the following in response to the Commission’s Consultation.
- No ring-fencing of the digital economy
It has been indicated previously – inter alia by the OECD – that the digital economy cannot be ring-fenced. Therefore, we anticipate that introducing measures aimed at digital companies only will likely result in arbitrary taxation, inequities, manipulation and/or market distortions.
Moving towards destination taxation
Many of the taxation options suggested by the Commission move away from the allocation of taxing rights over profits taking into account the arm’s length principle, towards taxing profits or turnover in the market jurisdictions where the service users or consumers are based (i.e. introducing ‘destination-based elements’ in international taxation). The justifications presented for this paradigmatic shift pivot around ‘fair taxation’ and value creation by data collection. A fundamental analysis and a political debate about what is actually ‘fair taxation’, and whether such a paradigm shift is actually widely supported, are lacking. A fundamental shift like this without clarity on underlying policy directions will increase risks of mismatches and double taxation issues, and hence in administrative inefficiencies, red tape and market distortions.
Short-term vs long-term
If the Commission believes that short-term measures should be introduced, pending further refined long-term solutions, sun-setting provisions should be considered to mitigate the risk that short-term measures become long-term measures. Moreover, the compliance costs for businesses and Member State tax authorities should not turn out excessive, as this could have a negative impact on growth and innovation in the internal market.
The role of data
The use of data seems to be identified as a distinguishing factor for the digital economy and as a cause for the challenges that digitisation presents for the international tax systems of countries. As mentioned, it appears that this is turning into a justification for a fundamental shift in the way taxing rights are allocated to taxing jurisdictions.
However, it is questionable if and to what extent raw data as collected has value, or if value is only created by aggregation and processing of data. If raw data has economic value, it is questionable if such value belongs to the company mining the data. Perhaps the mining of data across country borders is not so different from a company in the traditional economy buying raw materials abroad, so the question is whether there is a reason to treat those differently.
The Commission should give regard to EU law when it comes to the introduction of new forms of taxation for the tech sector. For example, the introduction of a ‘gross-based’ digital withholding tax could be in conflict with the EU treaty freedoms if profit taxes in equivalent domestic situations are levied on a net basis. Furthermore, it should be considered if the introduction of a virtual permanent establishment and corresponding amendments to profit attribution methodologies would impact a business’s choice of legal form. Especially if host states apply differences in tax treatment between permanent establishments and resident corporate taxpayers, conflicts with EU treaty freedoms could easily arise.
These are just examples of potential conflict with existing principles of EU law. A proper assessments and analyses can only be performed upon the presentation of any measures in a more concrete form.
- The Commission’s long term agenda
The Commission listed a wide range of short-term and long-term options in the Consultation questionnaire. All long-term options include at least some elements of destination-based taxation. In the questionnaire, the Commission states that “in order to properly address the challenges ahead, the Commission believes that a two-step approach might be needed: first a targeted, temporary solution followed by a comprehensive, long term one”. Given the listed long term options, this could be quite a far-reaching statement, as it is not clear if the scope of it is restricted to the taxation of a certain ring-fenced digital economy, or whether it is intended to refer to a comprehensive taxation model for all industries. In our view, for a proper debate about the topic, it would be useful if the Commission were to be more explicit on their envisaged ultimate objectives when it comes to taxing multinationals within the internal market.
For more detailed comments on the above points and on the taxation options as forwarded by the Commission, we kindly refer to our full position paper, as well as to the contribution of the Dutch Association of Tax Advisors (de Nederlandse Orde van Belastingadviseurs).
If you would like to discuss the above in more detail, please contact your regular advisor at Loyens & Loeff or any of the contacts persons of our Digital Economy Taxation team.
Dennis SchäferSenior associate Tax adviser
Dennis Schäfer is a tax adviser in our Investment Management group in our Amsterdam office. His work focusses on investment funds, both from a manager’s and investor’s perspective, real estate investments and international taxation.T: +31 205 785 456 M: +31 6 12 47 60 89 E: email@example.com
Pierre-Antoine KlethiSenior Associate Attorney at law / Avocat / Tax Adviser
Pierre-Antoine Klethi, senior associate, is a member of the Tax and Investment Management Practice Groups in our Luxembourg office. He focuses on corporate taxation (including relevant international developments), fund structuring and EU State Aid investigations.T: +352 466 230 429 E: firstname.lastname@example.org