European Commission Plans Digital Economy Reforms

By Global Tax Weekly

It’s been an interesting few days for the European Union, or more specifically its executive arm, the European Commission.

First came the announcement of a screening framework for FDI. This is intended to shine a light on the more shadowy sources of foreign investment into the EU. It’s quite ironic really; after all, the European Commission is hardly the most democratic and transparent of governmental organizations. More on the matter of transparency later.

The other notable development was the publication by the Commission of its vision for “fair” taxation of the digital economy, which came after France, Germany, and other influential member states had been pushing the issue of digital taxation for a number of weeks.

We can’t say for sure whether the Commission’s announcement is the result of increasing political pressure for solutions to tax issues in the digital economy, or whether it was working towards it independent of influence from member states. Either way, there is a sense that the EU is rushing towards legislation in this area, and that is never a good idea.

It is worth noting that not all member states are as enamored with the idea of a special tax on digital companies, or on the services they supply, as are France and Germany. Luxembourg’s Finance Minister, Pierre Gramegna, for example, has spoken out against the proposals currently being bandied around Europe, cautioning the EU that digital companies “might leave or circumvent Europe,” in an interview with Luxemburger Wort. Furthermore, he fears that such measures may look politically motivated as they will affect many US-based companies. “[T]hey might feel targeted so we also have political issues that need to be solved,” he told the paper.

Above all, this is a global problem requiring a global response, or at least discussed at the level of the OECD, Gramegna said. What was the point of BEPS otherwise? Indeed, as the OECD itself observed in its Action 1 report, the digital economy is increasingly becoming the economy itself. So, as Gramegna suggested, the EU should proceed very cautiously here.

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