The Commission will suggest on Thursday (21 September) alternatives to tax companies operating on the Internet, including a withholding tax on online sales of non-resident companies or a levy on revenues coming from digital services or advertising, according to a document seen by EURACTIV.
These ideas will add to the proposal championed by France – and supported at the informal Ecofin Council last weekend by ten member states – to introduce an equalisation tax on the turnover of Internet giants.
Apart from the equalization tax, the Commission gave no details about the other two alternatives.
Commission Vice-President Valdis Dombrovskis will present a communication on “A fair and efficient tax system in the EU for the Digital Single Market” on Thursday.
“Further work is needed on the detailed approach to find a workable solution for the single market and the global economy as a whole,” the Commission wrote.
In line with the ministers’ comments over the weekend, the Commission insists that “the current tax rules no longer fit the modern context” of the digital world.
And it warns that failing to address the existing flaws would lead to more cases of tax avoidance, impacting on social fairness and eroding the public resources.
The executive is expected to put forward a final proposal to tax the digital economy in spring 2018.
A ‘Zara tax’?
Regarding the withholding tax on digital transactions, it says it would be a standalone gross-basis final withholding tax on certain payments made to non-resident providers of goods and services ordered online.
This tax could significantly affect big retailers, as they have benefitted from fast-growing online businesses.
Between 2008 and 2016, the revenue of the top five e-commerce retailers grew on average by 32% per year. The growth of the entire sector in the same period was on average 1%.
Inditex, the parent company of Zara, increased its online sales by 40% in 2016 alone to reach €1.1 billion in revenues.
These revenues came from two subsidiaries: Fashion Retail, based in Spain, which groups Inditex online sales in the European markets; and ITX Fashion, based in Ireland, that groups the e-commerce of EEUU, Canada and Japan.
The Commission also proposes a levy on revenues generated from the provision of digital services or advertising activity.
The levy would apply to all transactions concluded remotely between customers from a member state and a non-resident company of that country but with a significant economic presence.
This proposal would impact Facebook, as its business model is primarily based on advertising sold to companies for their national markets.
Time to act
These three options are seen by the Commission as short-term solutions to ensure that digitalised companies pay their fair share of contribution.
“All short-term options have pros and cons”.
However, these options could raise issues about double-taxation treaties, state aid rules, fundamental freedoms, free trade agreements and WTO rules.
And yet “something has to be done” concludes the Commission.
The executive still believes that the Common Consolidated Corporate Tax Base proposal offers a basis to address the challenges posed by the tax erosion and profit shifting of Internet giants.
“There is scope within the current CCCTB proposal to examine further enhancements to ensure that it effectively captures digital activities”, the communication says.
Member states and the European Parliament are exploring options in the ongoing negotiations on the new CCCTB proposal.
The Commission, however, believes that the ideal solution for taxing the digital economy should be found at international level.
Ambition at G20 level
Early next year, the OECD will present an interim report on the taxation of the digital economy to the G20.
“The EU expects a high level of ambition as regards the interim report”, the communication said. The Commission wants “meaningful policy options” that address the challenges raised by these online businesses.
In particular, where the value of businesses is created and how it should be attributed for tax purposes.
Regarding the location, the Commission aligns itself with Estonia’s rotating presidency of the EU to review the permanent establishment rules.
It does not go as far as recommending a ‘virtual’ permanent residence. But the executive says that “alternative indicators for significant economic presence” are required beyond the physical presence.
In order to determine what profits can be allocated to countries, it indicates that transfer pricing rules (based on the functions, assets and risks within the value chain of the firm) are insufficient, as the digital economy is based heavily on intangible assets.
The commission does not come up with a specific proposal in this regard. But it notes that, in order to address potential risks of profit shifting across countries, “anti-abuse rules could be considered to enforce compliance”.