EU digital tax proposal – Unanimous interim measures.. | KPMG | UK

EU digital tax proposal – Unanimous interim measures dead in the water?

EU digital tax proposal – Unanimous interim measures..

This article discusses some of the latest developments surrounding the EU digital tax proposal that have taken place over the past few weeks.

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Following the meeting of finance ministers on 28 April 2018, it would appear that the interim measures proposed by the EU are unlikely to be unanimously adopted by member countries. The opposing countries believe that achieving a global consensus is key, to minimise the risk of double taxation and keep Europe attractive and competitive for international businesses. The supporting countries consider that swift action is necessary to ensure digital businesses pay their fair share of tax.

The opponents – achieving consensus and a coherent approach is key
Some countries, including the UK, Ireland and Denmark, share a view that is similar to that of the OECD, which is that achieving consensus at a global level is essential to formulating a coherent digital tax solution (in particular so that double taxation risk can be minimised). Countries that are reliant on foreign direct investment also expressed concerns that the adoption of a digital services tax (DST) regionally could have an adverse effect for Europe’s competitiveness and attractiveness for businesses.

The supporters – adopting a unilateral action in the interim
On the other hand, supporters of the EU’s interim solution, including France, Spain, Portugal, Poland and Italy, view the digital tax issue as one that is essential to ensuring tech companies (especially US tech giants) pay their fair share of tax. It is important not to lose sight however of the fact that the proposed 3 percent levy on digital services will not only affect US tech giants, but will also have an impact on many more businesses due to the prevalence of digital activities undertaken by them in the modern world.

Due to the lack of unanimous backing amongst the EU member states, Spain recently decided to proceed unilaterally by introducing its own digital economy turnover tax, whilst continuing to support the on-going French-led drive to adopt the DST across Europe.

Although it is clear that there is no consensus around the globe on what the ‘right’ solution is to address the distortion of traditional nexus (i.e. taxation of profits and value creation) created by the digital economy, it is worthwhile considering what the underlying rationale is to pursue an interim solution.

Undoubtedly, policy making is often inextricably linked to economics and political forces. There are views that the need to pursue interim measures is primarily driven by short term economic and political gains, which could act as an impediment in reaching consensus amongst countries and could risk turning the interim measures into permanent features because of the lack of a sunset clause. Thereby, some are of the view that the interim solution would do more harm than the long term benefits arising from reaching a long term global solution.

Digital Services Tax – challenges
The introduction of DST also brings about the following challenges that require further consideration:

  • It is not entirely clear whether DST is considered a direct or indirect tax given it is imposed on revenue generated from certain targeted activities. If DST is considered a VAT, it may be in violation of the EU rules, which prohibit the adoption of a second VAT; and
  • The lead time involved in redesigning business systems to capture the information required under the DST, as it is unlikely such information is readily available under the current system.

Despite the abovementioned challenges, the introduction of DST, on a positive note, may put pressure on the OECD to develop a final response sooner rather than later as evident in the OECD Secretary-General, Jose Angel Gurria’s, statement that the OECD is ready to accelerate its work, possibly advancing it to next year instead of to 2020.

Although it may still be a while for consensus to be reached at the global level, it is vital for interested parties to monitor closely the developments and take a lead role in voicing their views and positions in light of the far reaching consequences of this digital tax solution.

For further information please contact:

Karen Kwan

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