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17 January 2018

EU responds to challenges of profit taxation in digital economy

On 5 November 2018, ECOFIN adopted conclusions summarised in the document titled “Responding to the challenges of taxation of profits of the digital economy”. They are aimed at defining a common EU approach to the issue, in view of the expected international debate at the OECD level.

Václav Baňka
Lenka Fialková

The EU initiated the discussion on legislative solutions to the challenges raised by the digital economy in September 2017 during an informal ECOFIN meeting in Tallinn. Although an ‘equalisation tax’ as proposed by France, Germany, Italy and Spain, was accepted as a potential solution by some member states, consensus was not reached, as a number of other member states favoured a long-term solution building on traditional international tax rules. Following the meeting, the European Commission issued a communication on a fair and efficient tax system in the European Union for the digital single market, presenting tasks it deems critical for the taxation of businesses providing services or selling goods through digital platforms. The communication proposed both long-term – a fundamental reform of the international corporate tax framework – and short-term solutions, such as the introduction of an equalisation tax on turnover, a withholding tax on digital transactions or a levy on revenues generated from the provision of digital services or advertising activity.

Regarding the taxation of the digital economy, ECOFIN suggests that the concept of a ‘virtual permanent establishment’ be explored, allowing to tax profits in the state of the source without the seller being physically present there. The Council also recommends adjusting transfer pricing and profit attribution rules to reflect value creation in the individual digital economy business models. Data, including user ones, are important for both value creation in the digital economy and profit generation. The role of the data therefore has to be considered and taken into account in the context of transfer pricing and profit attribution rules.

Presently, the OECD is finalising a document on the taxation of the digital economy within its BEPS initiative. The document is to be published in April 2018. ECOFIN has urged the OECD to find appropriate solutions for upgrading the global network of bilateral tax treaties, the OECD Model Tax Convention and accompanying commentaries, as well as the various OECD guidelines on transfer pricing and profit attribution to permanent establishments. The Council also invited the Commission to submit its proposed solution, including an assessment of its legal and technical feasibility and the economic impact of possible responses to challenges of the taxation of profits in the digital economy at the beginning of the year.

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