This article is part of our special report Innovation and the Digital Economy.
There should no specific tax regime for online companies, experts Wednesday (28 May) told the European Commission, dealing a blow to supporters of an EU-wide “Google Tax,” targeted at the digital sector.
Retailers such as Amazon should also pay VAT in the countries they deliver to rather than where they are headquartered, the report by the Commission Expert Group on Taxation of the Digital Economy said. The “destination principle,” would prevent, for example, Amazon taking advantage of the low levels of VAT in Luxembourg, where it is based in Europe.
The report, written by experts led by former Portuguese Finance Minister Vítor Gaspar, is an influential paper on the future direction of EU taxation policy.
Countries such as France and Spain have called for an overhaul of the tax framework to prevent multinational online companies like Google or Facebook taking advantage of loopholes to pay less tax. An EU-wide levy would make that more difficult, France has argued (here and here).
France’s tax authority is suing Google for more than €1 billion in a battle that began in 2012. After an EU Summit in May, both French President François Hollande and UK Prime Minister David Cameron both discussed the technology giants and how little tax they appeared to pay (here).
But the experts said existing general rules for corporate taxation should be applied to digital companies to ensure they are treated in the same way as other businesses.
Digital Commissioner Neelie Kroes said, “We must avoid punitive taxes.”
“This is no longer about a digital sector, it’s about an entire economy that’s going digital,” she said.
Separating the digital and traditional economy no longer makes sense, as the Internet has become integral to many businesses, according to Kroes’ department.
“We cannot ignore the challenge to fairly tax digital products and services and the companies that provide them, and we must do so in a way that continues to encourage innovation,” she said.
The experts argued that a better way to combat multinational tax evasion was through the global project on Base Erosion and Profit Shifting (BEPS), conducted by the OECD. It was the only “immediate practical way forward”, it said.
The EU should speak with one voice on the project, but, “In order to achieve this, it would be necessary for member states to agree on a common position.“
Tax Commissioner Algirdas Šemeta said, “The EU must throw its full collective weight behind international efforts to clamp down on tax avoidance. Member states must speak with one voice.”
Google had not yet replied to a request for comment by the time of this article’s publication.
Currently, VAT on goods and services varies widely across the EU, which has hampered cross-border trade within the single market. Removing those barriers would help small to medium-sized enterprises, often cited as drivers of the economy, to grow.
As of January 2015, the destination principle will come into force for digital goods and services, which includes music and film downloads, provided within the EU. It already exists for non-EU supplied digital goods. A “One Stop Shop” web portal will be rolled out to ensure the correct tax is paid in the right member state.
The experts called for the destination principle it to be rolled out across the EU, and across all business to consumer goods and services, whether online or not, and for that to be supported by a broader one shop stop.
“The Group is of the view that the Commission and member states, in the field of taxation, should commit to eventually apply the destination principle to all goods and services,” it said.
Šemeta said, “I […] support the Group’s recommendation that the One Stop Shop approach should eventually be extended to all goods and services. The digital economy, as well as SMEs, would benefit greatly from this move.”
That would represent a huge change in European taxation. The experts said it would be achieved incrementally, and overtime.
Digital Commissioner Kroes praised the group for using digital taxation as a basis for conclusions on general tax simplification and transparency.
“We must ensure equal treatment of equal products and services. Personally, I would prefer that taxes are equalised downwards,” she added.
In the distant future, national finance ministers could conceivably agree to revise VAT tax rates upwards when setting common rates across the EU. That is a long way from happening at present.
But any change to European taxation rules requires the unanimous support of all member states to become law, which will be difficult to achieve. As will the creation of a global accord, which the experts also called for.
The group was appointed by the Commission five months ago, to inform their decision-making. An impact assessment will also be published this year.
It will be up to the next Commission to propose legislation on the issue, which will be debated by the European Parliament and Council of Ministers. Both those institutions can and will amend the legislation before it becomes law.
Ecommerce Europe said they would welcome a harmonised VAT system, and said that VAT could vary from member state to member state by as much as 10% (in the case of Luxembourg and Sweden).
“We want a level playing field between the online and real economy. They should not be treated, differently as they are now deeply intertwined. It doesn’t make sense not now and not in the future,” the trade association said.