In an increasingly technology driven era, often called Fourth Industrial revolution, the spectacular rise of digital economy challenges global and domestic tax revenue mobilisation. The European Union embraces the opportunities brought by the new era, at the same time faces its challenges.
9 of the world's top 20 companies by market capitalisation are now digital, compared to 1 in 20 ten years ago. The share of the digital technologies in the EU economy also grows exponentially. At the same time they are transforming the traditional way of doing business, by offering innovative financial services, improved ways of providing services and business models.
At the same time, existing tax rules seem to lag behind this fast development. They were designed for 'brick-and-mortar' businesses, meaning that a company should be physically present in a country to be taxed there. In the digital economy, applying the same approach is generating major fiscal distortion. The commerce along the supply chain is done virtually, in the digital economy, without a significant physical presence in one or any jurisdiction, although a company may still have physical stores, factories, or warehouses. Profits made through lucrative activities, such as selling user-generated data and content, may easily escape taxation rules, since there is a mismatch between where value is created and where taxes are paid.
The growing perception is that the digital economy is less regulated and taxed than other sectors of the economy, while the main issue is fairer taxation. According to the European Commission, the effective tax rate for digital companies - such as social media companies, collaborative platforms and online content providers - is around half that of traditional companies – and often much less. On average, digitalised businesses face an effective tax rate of only 9.5%, compared to 23.2% for traditional business models, since the business which generate value online are now growing far quicker than traditional economies, and today's rules cannot effectively tax profits generated largely from consumer data.
With this in mind, and to ensure that the digital economy is taxed in a fair, growth-friendly and sustainable way, the Commission has made two legislative proposals:
1) 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. A digital platform will be deemed to have a taxable 'digital presence' or a virtual permanent establishment in a Member State if it fulfils certain criteria. System aims at securing a real link between where digital profits are made and where they are taxed;
2) 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. This indirect tax would apply to revenues created from certain digital activities which escape the current tax framework entirely.
This system will apply only as an interim measure, until the comprehensive reform has been implemented and has inbuilt mechanisms to alleviate the possibility of double taxation. Tax revenues would be collected by the Member States where the users are located, and will only apply to companies with important revenues, to avoid that smaller start-ups and scale-up businesses remain unburdened.
By proposing a fair and effective EU solution to digital taxation, the Commission aims to improve certainty, stability and ease of business for companies in the Digital Single Market. Furthermore, a coordinated EU approach would prevent from a multiplication of spare national measures, and consequently from creating barriers for businesses and distorting competition in the Digital Single Market.
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