World Economy

EU Seeks Workable Solution to New Digital Tax System

The European Commission headquarters at the  Berlaymont Building in Brussels.
The European Commission headquarters at the  Berlaymont Building in Brussels.

European Union plans for a new taxation system for digital companies, such as Google, Skype and Amazon, all of which have European headquarters in Luxembourg, may reach “conclusions” by end-December.

A report from the European Commission in September said the challenge is to fix an international tax system first designed at the start of the last century and “is no longer fit for purpose”. It said the effective average tax rate for a traditional international business in the 28-member EU is 23.2% compared with 8.5% for a firm working to a digital domestic model, EUBulletin reported.

“We will listen to the commission’s positions because they have brought together different ideas. Their document is a good basis,” Estonian Finance Minister Toomas Toniste told reporters on Tuesday via a translator.  We want “conclusions by the end of our presidency”.

Toniste spoke before a meeting of the Economic and Financial Affairs Council—known as Ecofin—that brings together finance and economy ministers from EU nations. Relevant European commissioners are also participating in meetings, taking place in Luxembourg.

Estonia holds the presidency of the Council of the European Union. That six-month term will close at the end of 2017.

In its report, the commission set out its objectives in forming new tax rules; fairness, competitiveness, integrity of the single market and sustainability. It also offered different solutions.

One is to embed taxation of the digital economy in the general international corporate tax system. This would require “fundamental reform” to address specific challenges, such as digital companies that are able to have a significant market presence without a substantial physical presence.

The commission has announced that its preferred option, at the EU level, is the Common Consolidated Corporate Tax Base proposal. This revises rules about where a company is permanently established and uses the firm’s assets, labor and sales to calculate where its value is created, and the firm can be taxed accordingly.  

Because finding “a meaningful solution to capture and allocate the value created in the digital economy” may take a long time, it also suggested three short-term measures to protect direct and indirect tax bases in the different EU countries.

It proposed an equalization tax on the turnover of digital companies, a withholding tax on digital transactions and a levy on revenues generated from the provision of digital services or advertising activity.

“All short-term options have pros and cons, and 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 said in its report.

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