Digital Sector Based Own Resource conclusions reached by the EC Expert Group and OECD-BEPS Action Plan on taxation and the digital economy Directorate-General Communications Networks, Content & Technology Gianluca Papa Unit Knowledge Base and European Semester
HLEG on Taxation of the Digital Economy Established by the EC on October 2013, final report May 2014 Chaired by Vito Gaspar (former finance minister of Portugal), composed of academics, civil servants, managers. Main tasks:, " to provide a(n)... analysis of any deficiencies in the adaptation of current international tax rules to the digital economy, (especially in relation to tax revenues)", " to contribute ideas for the taxation of the digital economy and review possible alternative bases for taxation "
OECD-BEPS Action Plan On September 2013 OECD presented the Base Erosion and Profit Shifting (BEPS) Action Plan endorsed by the leaders of the G20. BEPS Action Plan (made of 15 Actions) is meant to address aggressive tax planning and tax avoidance by multinationals made possible by loopholes in international tax treaties Since the digital economy poses special challenges to taxation, Action 1 of BEPS was designed to address those challenges. Final BEPS report will be presented 5 th October 2015
Digital economy is becoming the economy Digitization Score, calculated from Eurostat s Community Survey on ICT usage and e- Commerce in Enterprises Composite index of 20 ICT indicators on connectivity &digital skills, online & social media presence, ebusiness, ecommerce
Key features of the digital economy Digital economy is about processing bits instead of atoms (N. Negroponte) Importance of intangibles in the value chain Mobility of intangibles, business functions, users Reliance on data (especially big data) Network effects Multi-sided business models Monopolies (online platforms), dynamic competition But also long tail (increasing variety), micromultinationals, sharing economy (prosumers)
Digital Economy and international taxation: main issues Base Erosion and Profit Shifting Increased mobility of production factors (especially intangibles) -> profit shifting to low tax jurisdictions Broader challenges of the digital economy Digital presence->no need for local(ly taxable) economic activities in the market country thanks to remote sales Greater role of user created data in the value chain -> role not recognised in current tax treaties Difficult characterisation of income from new business models (e.g. cloud computing as services, rentals or technical services)
Digital Tax Drive: Base erosion in market countries caused by increased digital activities Rationale: digital economic activity comparable to traditional economic activity, user role in the production of valuable data, some characterisation of income may justify withholding taxes Three different options considered: Tax on profits from remote sales of digital goods and services Excise tax on consumption of digital goods and services from remote sales Withholding tax on remote sales of digital goods and services
Assessment of digital tax proposals Proposed digital taxes have been dropped on the following grounds: Other OECD measures proposed to address BEPS tackle also some of the broader challenges The effective collection of VAT in the market country would make those measures redundant Those alternatives demand a too radical change of approach
Policy proposals/developments 1/2 Changes in the definition of Permanent Establishment - auxiliary activities in relation to business model. (EU, OECD) New Transfer Pricing guidelines more in line with value creation (EU, OECD) Strengthen Controlled Foreign Company rules (OECD, EU) Limit base erosion due to interest deductions (OECD,EU) Address hybrid mismatch arrangements (OECD, EU) Increase transparency (OECD, EU) EU Action Plan on Corporate Taxation (17 th June 2015). Applying OECD-BEPS rules in a coordinated way. In the long run move toward the CCCTB.
Policy proposals/developments 2/2 From 1 st January 2015, VAT on telecommunication, broadcasting and electronic services applies the destination principle. Electronic one-stop shop for those services. VAT application of the destination principle for all B2C cross-country transactions (EU,OECD). Administrative simplification for VAT collection (OECD)/extension of the one-stop shop (EU). Removal of small consignment exception (OECD, EU) Forthcoming EC proposal on VAT for remote sales in line with expert group recommendations. In addition: only a single VAT threshold to help EU SMES, home country control and legislation (or EU homogeneous legislation).
Conclusions Digital taxes based on 'digital metrics' pose implementation challenges Other types of digital taxes duplicate effects of other measures (especially VAT) Growth of DSM would lead anyway to growth of VAT revenues on electronic services/distance sales