Not cleared from scrutiny; further information requested
Communication from the Commission to the European Parliament and the Council: A Fair and Efficient Tax System in the European Union for the Digital Single Market
(39054), 12429/17, COM(17) 547
10.1This non-legislative Communication provides an update on the Commission’s thinking regarding taxation of the digital economy. In it, the Commission expresses concern that current global tax rules were designed for ‘brick and mortar’ businesses, and are not suited to the reality of modern digital businesses, which may have very little physical presence in a market and rely on intangible assets such as intellectual property.
10.2One consequence of this mismatch is that it is possible for digital providers to have a substantial economic presence in a country but to pay very little tax: the Commission provides statistics which suggest that the effective average tax rate for digital business models in the EU28 (8–10% on average) is less than half that paid by traditional business models (which pay an average of around 23%). As digitisation of the economy accelerates and extends into traditional sectors of the economy (e.g., hospitality, transportation) the implications for Member States’ tax bases are potentially significant.
10.3The Communication asserts that the EU needs to respond to these challenges to achieve a modern tax system. It suggests that, given the global nature of the digital economy, the ideal approach would be reform of global corporate tax standards, driven by the work of the OECD’s Task Force on the Digital Economy (TFDE). The Task Force is due to present an interim report to the G20 by spring 2018. The Commission states that it supports this process and wants it to reach ambitious conclusions with “meaningful policy options”. This would entail changing the current definition of a permanent establishment (the threshold which determines whether a country has a right to tax a business in its jurisdiction), as well as the standards used to determine how to attribute profits to those permanent establishments.
10.4The Communication suggests that there is a parallel role for EU-level corporate tax reform, and that its preferred option is for this to be achieved through its Common Consolidated Corporate Tax Base (CCCTB) proposal, which could be amended to ensure that it better reflects the challenges presented by the digital economy. Three prospective short term options are also identified: an equalisation tax on the turnover of digitalised companies; a withholding tax on digital transactions; and a levy on revenues generated from the provision of digital services or advertising activity. Prior to the publication of the Communication, ten EU finance ministers co-signed a political statement (‘Joint initiative on the taxation of companies operating in the digital economy’) that particularly supported the possibility of an ‘equalisation tax’ on the turnover generated in Europe by digital companies.
10.5The Communication concludes by calling on the Member States to agree a common position on this issue through Council Conclusions, in order to feed into ongoing OECD work. In the absence of adequate global progress, the Communication states that EU-level solutions should be advanced and that the Commission will be ready to launch a possible proposal by spring 2018.
10.6On 12 October 2017 the Financial Secretary to the Treasury (Mel Stride) submitted an Explanatory Memorandum to Parliament, in which he recognised the seriousness of the issue, and agreed that it merited consideration. The Minister said that the Government welcomed OECD work on this issue, given its global nature, but remained opposed to the European Commission’s Common Consolidated Corporate Tax Base (CCCTB) proposal. He indicated that the Government would consider the other options on their merits.
10.7ECOFIN Council discussed the Communication at its meeting on 5 December 2017. In its conclusions, the Council highlighted the urgency of agreeing on a policy response at international level, and called for close cooperation with the OECD and other international partners. In particular, the Council suggested that the concept of ‘virtual permanent establishment’ be explored, together with amendments to the rules on transfer pricing and profit attribution. The Council also recognised the interest of many Member States in temporary EU-level measures, calling on the Commission to assess thoroughly all options mentioned in its Communication, and looked forward to the Commission bringing forward appropriate proposals by early 2018.
10.8This Communication (“A Fair and Efficient Tax System for the Digital Single Market”) expresses the Commission’s view that certain features of the digital economy and current global standards on corporate taxation mean that digital business models pay significantly lower levels of tax than traditional business models. Given the acceleration of the digitisation of the economy, we note that this situation has potentially significant implications for Member States’ tax bases. The Government acknowledges that this is a serious issue which merits consideration.
10.9The chief effect of the Communication is to press the OECD’s Task Force for the Digital Economy’s (TFDE) interim report to the G20 in spring 2018 to present “meaningful policy options” which have the potential to tackle these concerns. However, the Commission also considers that EU-level action can complement global action, and indicates that its Common Consolidated Corporate Taxation Base proposal (which the Government opposes) is its preferred EU-level approach. The Communication also outlines three new short term approaches which could be used to address the issue on a temporary basis at EU-level, if progress is not made at a global level: an equalisation tax, a withholding tax on digital transactions, and a levy on revenues generated by digital transactions or advertising activity. These ideas are undeveloped, and the Commission indicates that further work on them is necessary. The Government says that it will evaluate these proposals on their merits.
10.10The Economic and Financial Affairs Council agreed Council Conclusions in relation to this Communication at its meeting on 5 December 2017. The Conclusions support the Commission’s Communication, preferring a global solution but inviting the Commission to undertake further work on short term solutions and to bring forward appropriate legislative proposals in early 2018. Legislative proposals therefore appear probable.
10.11We ask the Government to respond to the following questions:
10.12In relation to the UK’s withdrawal from the European Union, we ask the Government to clarify:
10.13We ask for an update from the December meeting of ECOFIN Council as well as responses to these questions by 23 January 2018. In the meantime we retain this document under scrutiny.
10.14A number of global and European initiatives are currently in development that involve tackling issues relating to tax avoidance and/or aggressive tax planning. These are briefly summarised below.
10.15The OECD defines base erosion and profit shifting (BEPS) as “tax planning strategies that exploit … gaps and mismatches in [countries’] tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid”. In October 2015 the OECD published a report, which had been developed by the Task Force on the Digital Economy (TFDE), setting out an Action Plan with 15 measures to address the BEPS problem. This package of measures was endorsed by the G20 in November 2015 and by the more than 100 countries and jurisdictions participating in the Inclusive Framework on BEPS.
10.16The report recognised that digitalisation and some of the resulting business models present some challenges for international taxation. However, the report also acknowledged that 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 digitalisation. While digitalisation and the resulting business models do not generate unique BEPS issues, some of the key features of digitalisation exacerbate BEPS risks.
10.17In July 2017, at their summit in Hamburg, the G20 Leaders reiterated their support for the OECD’s work on taxation and digitalisation, which followed the request made by the G20 Finance Ministers at Baden-Baden in March 2017, that the TFDE deliver an interim report on the implications for taxation of digitalisation to the G20 Finance Ministers in April 2018.
10.18The Common Consolidated Corporate Tax Base (CCCTB) is a single set of rules to calculate companies’ taxable profits in the EU. With the CCCTB, cross-border companies would have to comply with a single EU system for computing their taxable income, rather than multiple national rulebooks. Companies could file one tax return for all of their EU activities, and offset losses in one Member State against profits in another. The consolidated taxable profits would be shared between the Member States in which the group is active, using an apportionment formula. Each Member State would then tax its share of the profits at its own national tax rate.
10.19The Commission had originally proposed the CCCTB in 2011, but that proposal was rejected by the Member States. The House of Commons European Scrutiny Committee issued a Reasoned Opinion in relation to this proposal.
10.20The Commission issued a modified proposal for a CCCTB—a two-stage process which would begin with the establishment of a Common Corporate Tax Base (CCTB)—in December 2016, in response to which the European Scrutiny Committee drafted a Reasoned Opinion, which it recommended for debate. Difficulties with scheduling a meeting for European Committee B meant that by the time it had debated and adopted the Reasoned Opinion (20 December 2016) the relevant EU deadline had been missed.
10.21Little progress has been made on the CCTB proposal, which was most recently discussed at ECOFIN Council on 23 May 2017.
10.22In January 2016 the Commission published a package of hard and soft law measures, referred to as the Anti–Tax Avoidance Package (ATAP), aimed at preventing tax avoidance by large multinational companies within the EU. This package consisted of a proposed Council Directive to amend the Directive on Administrative Assistance and Mutual Cooperation in order to require Member States to adopt the BEPS Action Plan Country-by-Country reporting template, as well as a proposed Council Directive aimed at preventing tax avoidance within the EU through implementing three measures based on the outcomes of the BEPS Action Plan and three other measures.
10.23The Directive on the scope of the mandatory automatic exchange of information in the EU was published in the Official Journal on 3 June 2016. The Directive lays down rules in order to strengthen the average level of protection against aggressive tax planning in the internal market entered into force on 8 August 2016 and will apply from 1 January 2018 (with a derogation until 1 January 2020 to apply the exit taxation rules).
10.24The Commission’s Communication provides a high level analysis of what it considers to be the challenges facing the Members States in relation to taxation of the digital economy. It notes that existing tax systems are often based on the expectation that a company will have a physical presence where it undertakes activity, something that is increasingly less relevant when many digital businesses can operate with very little physical presence in a market. It also cites other factors, such as the increasing reliance on intangibles, as examples of how digitalisation is affecting tax regimes.
10.25The Communication states that the EU needs to respond to these challenges to achieve a modern tax system, and that its response should be guided by the principles of fairness, competitiveness, sustainability and integrity.
10.26The Communication states that the underlying principle for corporation tax is that profits should be taxed where the value is. However, with the digital economy it is not always very clear what that value is, how to measure it, or where it is created. The Commission therefore concludes that any long-term solution to this issue must resolve these questions.
10.27The Commission’s preferred solution to these challenges is to adapt the general international corporate tax framework so that the digital economy is effectively taxed within it. This would ensure the consistency and coherence of tax rules worldwide, and provide businesses with stability and certainty. These rules “could then be integrated into a Commission proposal that would establish binding rules for digital companies operating in the EU’s Single Market”.
10.28The Commission notes that these issues are being considered by the OECD’s Task Force on the Digital Economy (TFDE). This is a group of OECD countries who have agreed to examine digital taxation. The Communication says that the next important step in this area will be the interim report on the taxation of the digital economy that the OECD will present to the G20 in spring 2018. The Commission expects a high level of ambition from this report, and calls for the OECD to present “meaningful policy options”.
10.29Specifically, the Commission states that new international rules are needed to determine where the value is created and how it should be attributed for tax purposes. Reform of international tax rules on permanent establishment, transfer pricing and profit attribution applicable to digital technologies is needed, in its assessment.
10.30Permanent establishment rules are used to determine the threshold of activity that needs to be carried out in a country in order for a business to be taxable in that country, and are largely based on physical presence—an indicator which does not always effectively capture the activity of digital firms. Transfer pricing rules are used to attribute the profit of multinational groups to the different countries based on an analysis of the functions, assets and risks within the value chain of the group. The Commission states that these rules were developed for traditional business models, whereas digital firms are heavily reliant on intangible assets, and that the challenge of identifying and valuing intangible assets as well as determining their contribution to value creation requires alternative methods for attributing profit that better capture value creation in the new business models.
10.31In the absence of adequate global progress in the OECD interim report, the Communication states that “EU solutions should be advanced within the Single Market and the Commission stands ready to present the appropriate legislative proposals”. The Commission states that it will continue to analyse the policy options and consult with relevant stakeholders and industry representatives on this issue ahead of a possible legislative proposal by spring 2018.
10.32At EU-level, the Commission states that its Common Consolidated Corporate Tax Base (CCCTB) proposal is its preferred option. It says that the CCCTB provides an EU framework for revised permanent establishment rules and for allocating the profit of large multinational groups using the ‘formula apportionment approach’ based on assets, labour and sales, which would better reflect where the value is created. The Commission states that there is scope to revise the current CCCTB proposal to ensure that it better reflects digital activities, and that discussions are already underway on this in the Council under the Estonian Presidency and in the European Parliament.
10.33The Commission acknowledges that global or indeed European tax reform is a “multidimensional challenge” and is therefore likely to take time to resolve. On this basis it also identifies a number of “more immediate, supplementary and short-term measures” to protect the direct and indirect tax bases of the Member States.
10.34The short-term measures identified are:
10.35Further information is not provided about the possible approaches listed above. By the Commission’s own admission, each possesses advantages and disadvantages, and would require further work. The Communication also acknowledges that questions arise about the compatibility of such approaches with the double-taxation treaties, State Aid rules, fundamental freedoms, and international commitments under the free trade agreements and WTO rules.
10.36EU-level action on taxation is subject to unanimity voting in the Council, and so it will be challenging for the EU to adopt a common policy in this area.
10.37On 12 October 2017 the Financial Secretary to the Treasury (Mel Stride) submitted an Explanatory Memorandum (EM) to Parliament, outlining the Government’s views on the Communication.
10.38The Minister states that the Government is committed to the principle that corporation tax should be paid where value is created. By way of illustrating this support, he references to the 2015 Diverted Profits Tax (DPT), which is designed to counter erosion of the UK tax base via contrived arrangements which avoid trading in the UK through a UK permanent establishment or those which lack economic substance. He also notes that the Government has implemented/is currently legislating for a number of measures agreed as part of the OECD Base Erosion and Profit Shifting (BEPS) process. Finance (No. 2) Bill 2017 includes a measure to limit the deductibility of interest payments for tax purposes.
10.39The Minister states that “the UK acknowledges that the digital economy may pose additional challenges for corporate tax systems” and recognises that this issue therefore merits serious consideration. The Minister states that the Government welcomes the work taking place through the OECD’s Task Force on the Digital Economy, and notes that this process has been endorsed by the G7 and G20, “as reflects the global nature of the challenge”.
10.40The Minister is less enthusiastic about EU involvement in this policy area. He states that the Government believes there is value in discussing the issue at an EU level, as well as aiming for a common position that can be reflected in Council conclusions; however, he emphasises that EU discussions, and any conclusions agreed, “should seek to complement and reinforce the OECD work.”
10.41The Minister states that the Government will consider the three options outlined in the paper—the equalisation levy, withholding tax, and digital services levy—on their merits, and reiterates the Government’s opposition to the Commission’s Common Consolidated Corporate Tax Base (CCCTB) proposal, “as it does not believe this represents a proportionate or effective response to the challenges faced by corporate tax systems”.
10.42ECOFIN Council discussed the Communication at its meeting on 5 December 2017 and agreed Council Conclusions on this subject. The Conclusions appear to broadly align with the content of the original Communication.
10.43In its conclusions, the Council highlights the urgency of agreeing on a policy response at international level. It calls for close cooperation with the OECD and other international partners. The Council suggests that the concept of ‘virtual permanent establishment’ be explored, together with amendments to the rules on transfer pricing and profit attribution.
10.44The Conclusions also recognise the interest of many Member States for temporary EU-level measures, calls on the Commission to assess thoroughly all options mentioned in the Communication, and “looks forward to appropriate Commission proposals by early 2018, taking into account relevant developments in ongoing OECD work and following an assessment of the legal and technical feasibility as well as economic impact of the possible responses to the challenges of taxation of profits of the digital economy”.
98 European Commission, A Fair and Efficient Tax System in the European Union for the Digital Single Market 12429/17 (21 September 2017)
99 The Communication states that “on average, domestic digitalised business models are subject to an effective tax rate of only 8.5%, less than half compared to traditional business models.” It suggests that ‘digital international B2C model’ businesses pay a slightly higher average effective rate of 10%. In contrast, traditional domestic business models pay an average rate of 21% and traditional international business models pay an average rate of 23%. This data is taken from the PwC 2017 Digital Tax Index. See:
100 Joint initiative on the taxation of companies operating in the digital economy
101 Explanatory Memorandum submitted by HM Treasury on 12 October 2017
102 Council of the European Union, Digital taxation: Council agrees input to international discussions (accessed 5 December 2017)
103 Council conclusions on ‘Responding to the challenges of taxation of profits of the digital economy’ (5 December 2017)
104 Council conclusions on ‘Responding to the challenges of taxation of profits of the digital economy’ (5 December 2017)
105 OECD, Addressing the Tax Challenges of the Digital Economy, Action 1—2015 Final Report (October 5 2015)
106 European Commission, Common Consolidated Corporate Tax Base (CCCTB) (accessed 5 December 2017)
107 Reasoned Opinion of the House of Commons: Draft Directive on a common consolidated corporate tax base (7263/11)
108 European Commission, Commission proposes major corporate tax reform for the EU (25 October 2016)
110 Council of the European Union, Outcome of the Council Meeting—3543rd Council meeting—Economic and Financial Affairs (23 May 2017)
111 European Commission, Anti Tax Avoidance Package (accessed 5 December 2017)
112 European Parliament Legislative Observatory 2016/0011(CNS)—12/07/2016 Final act (accessed 4 December 2017)
113 European Commission, A Fair and Efficient Tax System in the European Union for the Digital Single Market 12429/17 (21 September 2017)
114 European Commission, Fact Sheet: Questions and Answers on the Communication on a Fair and Efficient Tax System in the EU for the Digital Single Market (21 September 2017)
115 Reuters, “France, Germany, Italy, Spain seek tax on digital giants’ revenues” (9 September 2017)
116 European Commission, Fact Sheet: Questions and Answers on the Communication on a Fair and Efficient Tax System in the EU for the Digital Single Market (21 September 2017)
117 Explanatory Memorandum submitted by HM Treasury on 12 October 2017
118 Council conclusions on ‘Responding to the challenges of taxation of profits of the digital economy’ (5 December 2017)
15 December 2017