The European Commission pushes forwards with its strategy to tax the digital economy of the European Union. Without prejudice to the current works of the G-20 and the OECD, the Commission is considering the creation of a tax so that the business operating within the EU digital economy pay a fair contribution.

The proposed digital tax will allow the EU to have its own resources. For its design, the Commission opened an impact evaluation together with a public consultation so that those who are interested can provide feedback about all facets of the digital tax and its possible effects.

Background information

The digitalisation of the economy has put a strain over the current tax system. This is due to the fact that it was designed back when the companies had very little international mobility. The discrepancy between the taxation rules and how the digital businesses work has become clear the last couple of years, as there are huge technological companies which have had an enormous volume of earnings with minimum taxation or, in some cases, even no taxation at all.

To face the challenges brought by the taxation of the digital economy, the EU, the G20 and the OECD have done multiple studies and proposals. Let’s not forget that the EU has been working since 2017 on a proposal to reach “an effective and fair tax system which adapted to the digital era”. After various agreements and two proposals for Directives, on March 2012 the EU Council discussed the Directive about the taxation to the digital services, without unanimous agreement. Thus, the Council decided to keep working to reach an international solution within the OECD field and agreed that, if by the end of 2020 the consensus if forecasted to take longer, the Council could debate again for a solution at the EU level.

Therefore, the EU and the countries members of the BEPS Inclusive Framework agreed to focus on reaching an international consensus about the taxation of the digital economy. The OECD presented a temporary report on March 2018 and published by 31 May 2019 its work plan in which an international consensus was estimated to be reached by the end of 2020. Additionally, on October 2020, the OECD published the General Plan of the Pillar one (focused on the nexus and appointment of profits) and the General Plan of the Pillar two (which proposes the creation of a minimum tax). After revising these two pillars, the Inclusive Framework members agreed that the two pillars provide the necessary groundwork to reach an international consensus, in which the work will continue until mid 2021.

In front of an unreachable international agreement and digital taxation unilaterally implemented by some EM (inside which Spain is included). The Commission proposes the creation of a digital tax which will make all technological businesses operating within the EU and that the traditional tax system does not affect contribute according to their earnings.

The Commission explains that this proposal will not interfere with the work of the G20 nor the OECD, as the reached agreements until now have focused on taxing big multinationals and a reduced number of activities related with the digital economy. Furthermore, the EU will take into consideration any international agreement that is reached.

Preliminary feedback on the impact assessment

On the impact assessment the following legislative options are to be examined:

• the implementation of a Corporate Income Tax making all companies with digital activities on the EU pay;
• the implementation of a tax over the profits generated by certain digital activities carried out on the EU and
• the implementation of taxation of the B2B digital transactions occurring on the EU.

Furthermore, the taxation subject, the definition of digital activities and the companies to be taxed will be evaluated. Likewise, how this tax interacts with the agreements network will be taken into account to avoid double taxation signed by the EM.

It is also foreseen that the initiative takes into consideration the taxation of small and medium companies, as well as the more dominant companies against the less dominant, and the effect on the consumers of the digital markets. At the same time, possible tax fraud and tax evasion behaviours must be predicted and prevented. As well as visualising the future development of the digital economy so that the tax regulation is useful on the long term.

The impact of this initiative must be analysed as broadly as possible, specially the impact that it will have on the businesses operating within the digital economy, included foreign companies operating in the EU, the competitiveness, the investment decisions and the productivity. The implementation costs will be taken into consideration too.  The deadline to provide comments and suggestions is until 11 February 2021.

Consultation with the interested parts

The public consultation is focused on 5 stakeholder groups: the EM, the companies of chambers of commerce (digital services, electronic commerce, small and medium companies), non governmental civic societies, the citizens and the academia. The consultation will be done through a questionnaire in which you’ll be asked to identify the current problems of taxation for the digital economy, as well as choosing some of the possible solutions specified on the prior point. In addition, it is possible to add a document with more suggestions and feedback.  Consultation will be open until 12 April 2021.

Proposed directive

Once the consultation period is over, the commission will draft a Directive proposal to implement the digital taxation and an action plan. It is expected to happen no later than June 2021.

Dr Alma D Virto Aguilar
Postdoctoral Researcher ETICCs Research Group