The rise of digitalisation and the dynamic technological advancements continue to influence the way we work, travel and communicate. In the past year, Dr2 Consultants has analyzed the impact of the COVID-19 pandemic for several of its clients. What clearly stems from the various analysis performed is that the Coronavirus has acted as a catalyst for a global transition towards a more digital world, resulting in behavioral changes with lasting effects. Against this backdrop of a rapidly growing digital economy, there is a need for a modern, stable regulatory and tax framework to address the technological developments and challenges. Over the past few years, there have been European and global initiatives regarding a reform on the international corporate tax framework and the implementation of digital taxes. While digitalization is encouraged and promoted as it can benefit the economy and society, digital companies have also been urged by lawmakers across the world to contribute their fair share to society.
On the EU level, in the context of the EU’s recovery from the pandemic, the European Council has tasked the European Commission to put forward proposals for additional EU own resources, one of which is a proposal for a digital levy. On the international level, the Organisation for Economic Co-operation and Development (OECD) has been working on a global solution regarding digital taxation by facilitating the negotiations between more than 100 countries over the past two years.
This Dr2 Consultants’ blog post presents the latest developments on digital taxation on both global and European level and provides a brief analysis of the potential impact of the future initiatives on businesses.
Background of digital taxation
In the past few years, the international community has been trying to reform the international tax system to address the digitalization of the global economy. The OECD has been tasked with designing a global compromise solution, with 137 countries participating in the negotiations. The new global digital tax regime, if adopted, will have an impact on various digital companies. Specifically, the main issue at stake has been the question of where multinational companies should pay taxes: in the country where they are headquartered or in countries where their customers reside. Since May 2019, the OECD has been hosting public consultations and negotiations to address the tax challenges of the digitalization of the economy (Pillar 1) and to address tax avoidance through a global minimum tax (Pillar 2). In particular, pillar one has been quite contentious, with strong disagreements between the United States and several EU countries.
The lack of agreement on digital taxation either on OECD or EU level could result in legal fragmentation and add a substantial burden to businesses around the world.
Besides the OECD’s efforts to reach a global solution, a group of EU Member States and the UK have proceeded with the implementation of national digital taxes to remain in force (at least) until an international agreement is reached. In 2019, France started applying a 3% digital services tax on big tech companies with revenue of more than €750 million of which at least €25 million generated in France. Italy and Austria have been applying their own digital levies of 3% and 5% respectively, since January 2020. Also the UK approved a 2% tax, applied from April 2020. Spain and the Czech Republic are currently in the process of discussing such taxes and the Belgian government has announced it will start work on a national digital levy in 2023 in case there has been no progress on OECD or EU level beforehand. The growing number of countries imposing national digital taxes makes the OECD negotiations and the EU’s upcoming proposal more and more pertinent. In fact, the lack of agreement on either level could result in legal fragmentation and add a substantial burden to businesses around the world.
Recent OECD developments
After failing to reach an agreement in 2020, the negotiating countries at the OECD level have set a new deadline to agree on a global compromise solution – end of June 2021. Between 27 and 29 January, the OECD held the 11th meeting of the OECD/G20 Inclusive Framework, to take stock of the state of play of the negotiations up to that point. Finance ministers from several countries, such as the UK, Italy, Germany and Canada, have expressed hopes that a global digital tax deal could be reached by the summer. They cautioned, however, that there was still outstanding work, specifically on Pillar 1. The demonstrated optimism has been confirmed by the newly appointed U.S. Secretary of Treasury, Janet Yellen, who has started bilateral talks with some of her European counterparts, showing commitment to continue the talks on a global tax agreement.
However, the change of the U.S. administration is not necessarily a sign for a complete reversal of the U.S. position on a global digital tax. While the new Biden administration is expected to remove the controversial proposal for the inclusion of a provision regarding “safe harbours”, allowing U.S. tech giants to opt out of the new regime, Secretary Yellen has stated in her Senate Confirmation Hearing that in case no deal is reached, the U.S.A. will consider the application of retaliatory tariffs. For the moment, the U.S. Trade Representative (USTR) has criticized the adoption of national digital taxes, but has refrained from imposing tariffs, while the OECD negotiations continue.
Recent EU developments
On 14 and 18 January, the European Commission launched, respectively, a roadmap and a public consultation on ‘a fair & competitive digital economy – digital levy.’ The initiatives aim to gather stakeholders’ feedback and views on the introduction of a digital tax to address the issue of fair taxation of the digital economy. The new initiative, according to the roadmap, is to be designed in a way that is compatible with the international agreement to be reached in the Organisation for Economic Co-operation and Development (OECD) as well as broader international obligations. The new EU digital levy initiative could potentially include a corporate income tax top-up to be applied to all companies conducting certain digital activities in the EU, a tax on revenues created by certain digital activities conducted in the EU, and/or a tax on digital transactions conducted business-to-business in the EU.
Potential implications of digital taxation for businesses
Dr2 Consultants expects the new initiative regarding EU digital taxation by the European Commission to have an impact on businesses engaging and operating in the digital economy, including foreign businesses operating in the EU. In addition, it will also affect tax compliance costs, tax revenues, competitiveness of EU digital companies, and ultimately consumers. While stating that the Commission proposal is not supposed to interfere with the OECD negotiations, and previously committing to withdrawing its proposal in case of an agreement at the OECD level, the European Commission has recently confirmed that it will move forward with publishing a proposal on an EU digital levy in June 2021, regardless of the outcome of the global negotiations.
While the digital tax measures are generally supposed to target large digital companies, their effects are likely to have a wider impact.
The upcoming Commission proposal is likely to use an eventual OECD agreement as a basis and add additional requirements for businesses operating within the EU, the details of which remain unclear for the moment. However, such approach could pose a risk of legal fragmentation and might encourage more EU Member States to adopt national digital tax measures in the meantime. Furthermore, businesses are fearing unilateral measures, national or European, as they might lead to double taxation, market distortion and retaliation from other countries. Both the EU and the OECD initiatives will likely target automated digital services and consumer-facing businesses, such as search engines, social media platforms, online marketplaces and businesses selling goods and services to consumers online. It has been clarified that intermediate products and components for consumer products would be out of scope, with some of them remaining subject to possible exceptions. In terms of thresholds, companies falling under the scope of the initiatives will have revenues of at least €750 million, with sales in each country reaching a specific revenue threshold. However, the details of the scope of the future initiative are still a subject of debate at the OECD negotiations. Similarly, as the EU proposal is in a very early stage, one might infer that the OECD requirements will translate as minimum requirements in the EU proposal.
While the digital tax measures are generally supposed to target large digital companies, their effects are likely to have a wider impact. When being confronted with a new digital tax, there are various ways in which companies can integrate it into their business model. As can already be seen from the introduction of unilateral digital taxes in some European countries, some companies might decide to absorb the additional costs themselves, while others might decide to pass on the extra costs to their business customers or users via price increases.
Dr2 Consultants advises businesses to pay close attention to these developments in the coming months. In particular, on the OECD level, leaders are expected to continue with the negotiations regarding a global digital tax regime, and potentially reach an agreement by the end of June 2021. According to Pascal Saint-Amans, Head of taxation at the OECD, the best-case scenario would be reaching a high-level agreement on taxation by June, and then clarifying the details of the agreement during the Indonesia Presidency of the G20 in 2022. Furthermore, even when a full agreement is reached, given the fact that 137 countries participate in the negotiations, the implementation of the new rules will be a time-consuming endeavour.
On the EU side, the Commission proposal on an EU digital levy is expected in June 2021, after which the discussions will continue in the Council of the EU, as taxation matters are decided by unanimity. Although the European Parliament does not have a definitive say on tax matters, the EU Parliament’s Economic Affairs’ Committee (ECON) has already released a draft report, calling for an EU solution on digital tax and stressing the importance of a level playing field for providers of traditional services and digital services in the EU.
Dr2 Consultants continuously monitors the developments of the discussion on the new global, EU and national tax regimes, and supports its clients on these matters accordingly. Should you be interested in further information on digital taxation and how it could impact your business, you can reach out to Dr2 Consultants at firstname.lastname@example.org or find more information on our website.
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