EC: Communication on taxation of single digital economy | KPMG | GLOBAL

EU: EC communication on taxation of single digital economy

EC communication on taxation of single digital economy

The European Commission today released a communication on a “fair and efficient tax system” in the European Union for a single digital market. The communication was released following an informal meeting of the Economic and Financial Affairs Council (Ecofin) of the EU.

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The communication presents critical challenges in taxing businesses that provide services digitally and proposes both long-term—a fundamental reform of the international corporate tax framework—and sort-term solutions such as:

  • The introduction of an equalization tax on turnover
  • A withholding tax on digital transactions
  • A levy on revenues generated from the provision of digital services or advertising activity

Single digital market

The EC today presented to the Council and the European Parliament its communication on a fair and efficient tax system in the European Union for the single digital market. The EC outlined the challenges that policymakers face in determining that the digital economy is taxed fairly, and noted two main challenges to be addressed so that profits are taxed where value is created: 

  • Nexus—determining which state has taxing rights over services provided digitally and a commercial presence is only virtual
  • Value creation—allocating profits to such a virtual presence, when value is created through intangible assets, data, and knowledge

The EC communication concludes that EU Member States need to address these challenges in a coordinated manner to safeguard fair competition within the EU single market and proposed both long-term and short-term solutions. In the long-term, the EC recommended that international tax rules be amended to embed the taxation of the digital economy in the general international corporate tax framework and to update indicators of a significant economic presence in line with the new digitized business model (e.g., an updated definition of the permanent establishment). 

One challenge that would need to be addressed in this context is the attribution of profits generated by digital businesses by identifying and valuing intangible assets and establishing their contribution to value creation. Alternative approaches to traditional transfer pricing methods would be required—together with specific anti-abuse rules—in order to prevent the shifting of profits outside the country where value is created. At the EU level, the EC mentioned the possibility of amending the common consolidated corporate tax base (CCCTB) proposal to capture digital activities.

 

Read a September 2017 report prepared by KPMG’s EU Tax Centre

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