On 26 October 2017, the European Commission (hereafter “the Commission”) launched a public survey on how to introduce a fair taxation of the digital economy. The objective of the initiative is to further define the European approach to the taxation of the digital economy.
The survey follows the publication of a Communication on a fair and efficient tax system in the European Union for the digital single market (see also on this blog: The Digital Economy and “Fair” Taxation: The time to act was yesterday).
Businesses, organisations and individuals established in the EU are invited to contribute. Afterwards, the European Commission will prepare a summary report, which will most likely serve as a basis for further policy proposals.
The questionnaire is divided in two main parts. The first part focusses on the current international tax framework and its shortcomings. It aims to measure to what extent the current international tax rules are adapted to the digital economy and to identify the main challenges that digitalisation of the economy brings:
- For businesses (e.g. uncertainty with regard to tax obligations, profit allocation, valuation of data, increased competition from global players, …); and
- For national tax systems (e.g. access to a country’s market without effective taxation in that country, creation of new sources of revenue which are not properly taxed, unfair competition arising from differences in taxation, difficulties to establish the tax liability due to the complexity of the value chain, …).
A second part explores the possible solutions to address those shortcomings. The Commission wishes to measure to what extent, amongst others, a so-called two-step approach would be feasible.The two-step approach involves a short-term solution to be put into place, until a long-term solution is implemented. The commission itself has identified 4 possible short-term solutions, namely:
- The introduction of a tax based on revenues from defined “digital activities”;
- The introduction of a withholding tax on payments to non-resident providers of goods or services ordered online;
- The introduction of a tax based on the revenue from digital transactions (e.g. revenue from online advertising) concluded remotely with non-resident entities with a significant economic presence in the respective State;
- The introduction of a digital transaction tax (which applies early in the value creation process) on the collection of data.
The Commission has furthermore identified several possible long-term solutions:
- New permanent establishment rules and rules for profit attribution, within the framework of the CCCTB proposal or a separate EU directive;
- Destination based taxation, i.e. taxation of the income in the jurisdiction of the customer;
- A unitary tax, i.e. a tax on the global presence of digital companies, which would be attributed to each state on the basis of the percentage of revenue earned in that state;
- A residence tax base with destination tax rate: taxation of the profits in the state of establishment, but where the applicable tax rate is determined on the basis of the turnover-weighted average of the tax rates of the states where the turnover is generated.
The general public is also invited to identify and specify any other possible short-term and/or long-term solutions.
The public consultation will be open until 3 January 2018. The link to the survey can also be found here.