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EU Ministers Agree on Developing New Int’l Digital Taxation Rules

A common solution that covers the entire EU is important because different tax rules in member states can create multiple taxation and lead to a belief that doing business outside of the EU is more lucrative than inside the EU
Estonian Minister for Finance Toomas Toniste talks to reporters after the meeting.Estonian Minister for Finance Toomas Toniste talks to reporters after the meeting.

The finance and economic affairs ministers of the European Union member states discussed updating international tax rules for companies at their informal meeting in Tallinn, capital of Estonia, Saturday, so that these rules could also be applied to taxing enterprises that use digital technology.

A press release issued after the meeting said that the ministers agreed to move forward swiftly and to reach a common understanding at the Ecofin Council in December,  EUreporter said.

"For us, it is important to agree on new international tax rules that also take into account the business models of the digital economy. This would guarantee the equal taxation of all companies regardless of their location or place of activity. I hope that today's discussion helped us get a step closer to a suitable solution," Estonian Minister for Finance Toomas Toniste said after the meeting.

The current international rules for taxing the profit of companies, which assume that in order to create a taxable profit, the company has to be physically present, allows many companies not to pay their taxes because the tax rules are out of date, as business models of the digital economy differ substantially from the business models of the traditional economy, and companies often operate virtually in several countries, the press release said.

The ministers also agreed that the further cost-efficiency and sustainability of the customs union's IT systems are important topics and the way the systems are developed currently requires change.

"We see that there is a common understanding that future customs union IT systems development require a change of policy in order to gain efficiency and cut costs for member states and trade, although the best method has yet to be decided," Toniste said.

"More discussions on the expert level are needed to achieve an agreement on how to go further. There is strong support for a pilot project and it could prove that the centralized approach to the IT works for the customs union," he added.

According to Toniste, a common solution that covers the entire European Union is also important because different tax rules in member states can create multiple taxation and lead to a belief that doing business outside of the EU is more lucrative than inside the European Union.

 “If we can agree on the approach inside the European Union, then we can also affect the global rules in a way that is favorable to us. We all agree that a global solution would be the best solution.”

“This would guarantee the equal taxation of all companies regardless of their location or place of activity. I hope that today’s discussion helped us get a step closer to a suitable solution.”

Business Models

Business models of the digital economy differ substantially from the business models of the traditional economy, and companies often operate virtually in several countries. The international rules for taxing the profit of companies, however, still assume that in order to create a taxable profit, the company has to be physically present. This allows many companies not to pay their taxes because the tax rules are out of date. This is also one of the reasons why this situation cannot simply be solved with measures that stop companies from evading their taxes.

Estonia is of the opinion that when bringing the tax rules up to date, it is important to abandon the requirement that companies have to be physically present in a country or own assets there, and replace this with the concept of a virtual permanent establishment.

A precondition for this is a more precise agreement on the virtual taxpayers who have to start paying taxes.

Electronic Data

According to the Union Customs Code, all data exchange between customs authorities and businesses must be electronic from the beginning of 2021.

Despite the ever increasing harmonization of law and the standardization of procedures, there is significant duplication in the development and operation of IT systems.

The EU is one of the main players in overall global trade, with a total share of 16%. Besides providing protection to EU citizens, each year EU customs authorities collect 15% of the EU's total revenue, according to the press release.

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