Digital companies in the European Union (EU) pay less than half the amount of tax that other companies pay, the European Commission said in a report. The EU needs a modern tax framework to seize digital opportunities, while also ensuring fair taxation, the report added.
Within the EU, international businesses typically pay a 10.1% tax rate while traditional companies pay 23.3%, due largely to the difficulty of taxing digital assets, which are typically Internet-based. This is particularly important given that more than half of the world’s top 20 companies are technology-based. The Commission stated that the best solution to address this distortion would be on a global level, but in the absence of sufficient progress, the EU should move ahead alone.
Short-term solutions include:
• An equalization tax on all untaxed or insufficiently taxed income generated from all Internet-based business activities, including business-to-business and business-to-consumer, creditable against the corporate income tax of a separate lever,
• A withholding tax on payments to digital businesses, and
• A levy on revenues from advertisement or other services provided by digital firms.
In the longer term, the Commission said that the EU should review the notion of “permanent establishment” so that firms could also be taxed in countries where they don’t have a physical presence.
The CBO examines corporate inversions
The Congressional Budget Office (CBO) recently published a report titled An Analysis of Corporate Inversions. As described by the CBO, “a corporate inversion occurs when a U.S. multinational corporation completes a merger that results in its being treated as a foreign corporation in the U.S. tax system, even though the shareholders of the original U.S. company retain more than 50% of the new combined company.”
U.S. companies have engaged in corporate inversions since 1983. According to the CBO, concern grew in 2014 because the group of corporations that announced plans to invert that year included some that were very large, with combined assets of $319 billion — more than the combined assets of all of the corporations that had inverted the previous 30 years. The reduction in companies’ worldwide tax expenses following an inversion results from changes in both U.S. and foreign tax expense, the CBO noted.
The report is divided into the following sections: strategies to reduce worldwide corporate tax liabilities; reasons corporations decide to invert; an overview of past inversions; changes in companies’ tax expense; and the effects of inversions and other international tax avoidance strategies on the corporate income tax base over the next decade.
Digital economy tax challenges
Ángel Gurría, Secretary-General of the Organisation for Economic Co-operation and Development (OECD), addressed the difficulties of taxing the digital economy.
At a meeting of the European Economic and Financial Affairs Council (ECOFIN) on international taxation, Gurría focused on the tax challenges occurring from the digitization of the economy.
Through the OECD’s base erosion and profit shifting (BEPS) project, agreement has been reached that VAT should be collected in the countries of destination of e-sales and e-services. Under the destination principle, tax is ultimately levied only on the final consumption that occurs within the taxing jurisdiction. Over 100 countries are implementing the new International VAT/GST Guidelines, which are fully aligned with EU rules.
The EU has identified the total VAT revenue declared via its Mini One Stop Shop (MOSS) as in excess of €3 billion in 2015, its first year of operation. MOSS allows you to supply the following services within the EU without the need to register in each EU country you supply to:
• Telecommunication services,
• Television and radio broadcasting services, and
• Electronically supplied services.
The G20 has delivered a mandate to the OECD to produce an interim report by April 2018.