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ECOFIN meeting: Taxation of digital economy and definitive VAT system

The main tax issues discussed at the Economic and Financial Affairs Council’s October meeting were the taxation of the digital economy and the implementation of a definitive VAT system. The ECOFIN approved a draft directive implementing a new system for the resolution of double taxation disputes within the EU.

At the meeting, the European Commission presented its communication on the taxation of businesses operating in the digital economy. The communication primarily provides short-term solutions, such as an equalisation tax on the turnover of digitalised companies, a withholding tax on digital transactions and a levy on revenues generated from the provision of digital services or advertising. The taxation of the digital economy intends to primarily target companies that do business in new ways, such as Facebook, Amazon or Netflix. Eventually, the objective will be to select the most appropriate taxation method to be applied to these companies on a global basis in the long-term.

In the area of VAT, the European Commission presented its proposal to implement a definitive VAT system, aimed to reform and replace the current VAT system in effect in the EU since 1993. The new system should ensure the same tax treatment of both cross-border and domestic supplies of goods and services, thus fulfilling the Commission’s goal to reduce tax evasion and VAT fraud.

The ECOFIN approved a draft directive implementing a new system of resolving disputes arising from the interpretation of double tax treaties within the EU. The dispute resolution mechanism should be mandatory and binding, with clear time limits and an obligation to achieve results. The tax administrations of the states concerned should resolve a dispute within two years. If the time limit is exceeded, the dispute will be taken to an arbitration court where it will be resolved by an independent arbitration panel. The directive should ensure higher certainty in resolving double taxation disputes. The EU member states should implement this directive into their legal frameworks by 30 June 2019.