Thu. Nov 21st, 2024

EU Council background on digital taxation

Nov 1, 2024 , , , , , , ,

Brussels, 1 November 2024

Tax rules for the digital economy which are based on the principles of tax good governance can help promote growth and, among other benefits, deliver on the green and digital transitions.

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Why is there a need for a fair taxation of the digital economy?

The digital economy has brought many benefits to citizens and companies. At the same time, the rise of certain digital activities and novel business models has become a growing challenge for existing taxation systems. It is important that all sectors of our economies pay their fair share of taxes and contribute to the functioning of our societies.

The current rules governing international taxation matters were designed to apply to businesses with a physical presence in a country. The increasing digitalisation of economies presents tax challenges, such as the reduction of tax revenues due to abusive tax avoidance and tax evasion. Tax rules therefore need to be adequately updated.

With the rise of new technologies and business models, many digital businesses:

  • have users and customers in a country where they do not have any physical business presence
  • generate profit from interaction with users and customers, using their data and contributions

Since tax rules still presume a physical presence, profits from digital activities are often not taxed in a market jurisdiction (i.e. the country where the users and consumers are located).

The EU towards a fair digital taxation system

Global reform of international rules on corporate (business) taxation

EU legislation on corporate tax rules is closely linked to and driven by efforts to find global solutions. The G20 and the OECD have been leading negotiations on international digital taxation with a view to reaching a consensus on a long-term global solution.

The work is principally being carried out by the G20/OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The initiative has already brought together 140 countries and jurisdictions.

On 8 October 2021, the OECD/G20 Inclusive Framework on BEPS reached an agreement on the key aspects of a reform of the international rules on taxation of the profits of multinational enterprises. This agreement is laid down in the statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy, also known as the ‘October 2021 statement of the OECD/G20 Inclusive Framework on BEPS’.

All EU member states expressed their support for this statement, both as members of the Inclusive Framework and in the Ecofin Council and the European Council.

The October 2021 statement of the OECD/G20 Inclusive Framework on BEPS provides for a two-pillar solution.

Pillar one consists of rules and arrangements that will enable the reallocation of taxing rights among the jurisdictions where the largest and most profitable multinational groups have their share of the market and earn profit.

Pillar two essentially comprises rules on minimum effective taxation of the largest multinational groups, aimed at reducing the opportunities for tax base erosion and profit shifting. It also aims to ensure that the agreed global minimum rate of corporate tax – 15% – is paid.

Pillar one: reallocation of taxing rights

The main expected output of pillar one is a multilateral convention which will allow the parties to exercise (or ‘reallocate’) a new taxing right (‘amount A’).

The text will cover a wide area of rules concerning

  • scope, nexus, tax base
  • revenue sourcing rules on elimination of double taxation
  • dispute prevention and settlement
  • removal and standstill of unilateral measures (such as national digital taxes)
  • entry into force of the convention

‘Amount B’ of pillar one will provide increased tax certainty by creating standardised transfer pricing benchmarks for common transaction types.

Pillar two: minimum effective taxation

Work on pillar two has advanced more quickly than on pillar one. The OECD/G20 Inclusive Framework on BEPS approved the OECD model rules ‘Tax challenges arising from the digitalisation of the economy – global anti-base erosion model rules (pillar two)’ on 14 December 2021. All member states have committed to these rules.

Minimum effective taxation, which constitutes the essence of pillar two, is based on two main rules, also known as global anti-base erosion model rules (‘GloBE rules’):

  • the income inclusion rule (IIR)
  • the undertaxed payment rule (UTPR)

These rules are intended to ensure that the profits made by multinational groups with a turnover of at least €750 million are taxed at an effective rate of at least 15%.

The pillar two rules were transposed into EU law through a Council directive of 15 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the EU.

Finalising the two pillars

In its meeting on 10-11 July 2023, the G20/OECD Inclusive Framework on BEPS made further progress on the remaining elements of the two-pillar project. As one of the key points, it was confirmed that the final agreement on and the signature of the multilateral convention are expected to take place by the end of 2023.

EU tax policy for the digital economy

The EU is working in several areas to make sure that current taxation rules are fit for the digital age. These issues have been among its top priorities since 2017.

In March 2018, the European Commission proposed new rules to ensure a fair taxation of digital activities in the EU which also promotes growth. The Commission proposals are now on hold, in light of the fact that negotiations in the G20/OECD Inclusive Framework are progressing. If a global solution and agreement in these negotiations are reached and effectively implemented, the proposals would become obsolete.

The 2018 digital taxation package consisted of two legislative proposals to:

  • reform corporate tax rules so profits are taxed where companies have a significant digital presence
  • develop an interim tax for revenues from digital services (digital services tax)
Administrative cooperation on exchange of tax-related information

One of the key building blocks of EU tax policy is administrative cooperation through exchange of tax-related information between member states. This helps ensure effective revenue collection.

The digitalisation of the economy presents particular challenges in this field as well, as certain types of information about revenues or income from digital economic activities might not be accessible to national tax authorities.

In order to overcome this problem, and in line with globally agreed standards, the EU is widening the scope of administrative cooperation through targeted amendments to the directive on administrative cooperation in the field of taxation (DAC).

In March 2021, the Council adopted new rules (‘DAC7’) under which, from 2023 onwards, member states’ tax authorities automatically exchange information on income earned by sellers on digital platforms. This will help to:

  • prevent tax evasion and tax avoidance in relation to activities on such platforms
  • enhance tax fairness
  • foster a level playing field for both platforms and sellers

On 17 October 2023, the Council adopted a directive including a new set of amendments to the DAC rules (known as ‘DAC8‘). The changes mainly concern:

  • the reporting and automatic exchange of information on revenues from transactions in crypto-assets
  • information on advance tax rulings for the wealthiest (high-net-worth) individuals

The aim is to strengthen administrative cooperation among tax administrations and to enlarge the scope of registration and reporting obligations.

The new rules will cover additional categories of assets and income, such as crypto-assets. Tax authorities will need to automatically exchange information provided through reporting by crypto-asset service providers. So far, it has been difficult for member states’ tax administrations to ensure tax compliance in this specific area. As crypto-assets are decentralised and easily traded across borders, strong international administrative cooperation is required to ensure that taxes are effectively collected.

VAT in the digital age package

The EU is also working on new measures to reform the EU’s value-added tax (VAT) system to make it fit for the digital age.

VAT is one of the most important sources of revenue for member state authorities, contributing to public services such as education, healthcare, libraries and public transport. Every year, EU member states raise about €1 trillion in VAT revenue in the EU.

A share of VAT also goes to the EU budget as an ‘own resource’. This amounted to about €20 billion to the EU budget in 2022.

Yet, significant amounts of VAT revenue remain uncollected and lost due to fraud, maladministration, bankruptcies, and insolvencies and other factors: €61 billion estimated VAT revenues lost by member states in 2021.

In December 2022, the Commission presented the ‘VAT in the digital age’ package, which aims to help tackle VAT fraud, support businesses and promote digitalisation.

The package includes proposals for:

  • single VAT registration for businesses, valid across the EU
  • VAT rules for the platform economy, related to passenger transport and short-term accommodation rental
  • digital reporting obligations based on e-invoicing for businesses operating across borders in the EU

See also

Source – EU Council

 

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