EU Considers Digital Taxation Proposals

By Global Tax Weekly

Are we in danger of seeing the wheels fall off the BEPS vehicle? If multilateralism is supposed to the be lynchpin holding the whole thing together then some members of the international community, intentionally or not, seem to be doing their best to pull it out. And the danger is that the wheels could go careering off in different directions, which surely helps nobody.

The European Union is one party in an awful hurry to find solutions to the riddle of the digital economy. Indeed, EU Competition Commissioner Margrethe Vestager more or less threatened to wrest the digital taxation project from the OECD last week, when she said that the Commission would publish its own proposals for more effective taxation of the digital economy early next year if the OECD hadn’t got its act together by then.

Some would applaud the European Commission for taking this issue by the scruff of the neck and dragging it forward, given the public outrages over the tax affairs of big internet-based companies. But equally there is a danger that rushing to quell public uproar could result in measures that are ill-conceived and have unintended consequences in practice. And perhaps this is the reason why the OECD isn’t moving as fast as the EU would like, because it recognizes that there are no easy answers, and that blunt tax instruments (as the EU’s proposed equalization has been described) tend, by definition, to result in collateral damage.

As many have observed, taxing company revenue is a major departure from international norms in taxation, and could lead to instances of double taxation, not to mention legal uncertainty with regards to the application of double tax avoidance treaties. And as the OECD’s final report on BEPS Action 1 acknowledged, it would be difficult, if not impossible, to “ring-fence” the digital economy from the rest of the economy for tax purposes because of the increasingly pervasive nature of digitalization.

The strong response to the OECD’s latest consultation on the taxation of the digital economy – it received comments from a total of 62 stakeholders, an unusually high number compared with the responses received in earlier consultations on BEPS Action items – certainly suggests that taxpayers and other stakeholders consider this to be one of the most important pieces of the BEPS puzzle. And by extension, this calls for considered and measured responses from the relevant authorities. Marry in haste, repent at leisure, as they say.

But perhaps the OECD is fighting a losing battle against unilateralism, which seems to have taken root in certain member states of the EU, ironically, since the institution’s intention is to bring about unity.

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