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~ Spotlight on ~

As a consequence, highly populated (but also relatively Since 2018, both the EU legislative proposals have, how-
high-tax) countries - for instance, France, Germany or ever, lost support among EU member states and, given that
Italy - garner modest tax proceeds from foreign-supplied they need the unanimity of EU member states to become
digital services, even if these services are consumed by lo- law, we would say that they are currently at the stage of
cal users. Basically, European states with high consumption “crossing a desert”.
of digital services get the lion’s share of VAT revenues, but
not much corporate tax revenues in their coffers. What the OECD is trying to do
The Organisation for Economic Co-operation and Devel-
International tax rules are suffering the test of time for opment (OECD) is also focusing on long-term reform of
a specific reason, above all: most rules fail to account international tax rules based on two pillars.
for the factor that, contrarily to traditional manufactur-
ers, distributors or service providers, digital businesses Pillar One concerns measures to reallocate taxing rights in
do not need a physical presence in their output markets favour of market jurisdictions and to introduce the concept
(e.g., office, workshop, local agents, etc.). You can sell of permanent establishment based on a significant digital
movie-streaming services from Ireland to Italian consum- presence. Pillar Two includes measures aimed at preventing
ers without any office or staff in Italy. Hence, no taxable multinational groups from shifting profits toward low-tax
“permanent establishment” usually arises in the country of jurisdictions (an income inclusion rule and a tax on base
destination of services. eroding payments).

What the European Union is trying to do The long-term solutions proposed by the OCED are more
Europe does not look favourably to the uncoordinated pro- recommendable than any short-term digital tax because
liferation of national digital taxes. The risk of this danger- they do not “ring-fence” the digital economy. At the same
ous trend is to affect the freedom of circulation of services time, they promote an organic approach in reshaping inter-
in Europe and to harness the consolidation of a European national tax treaties and domestic tax laws.
Digital Single Market.
It will take years before the OECD proposals (if agreed
Most current and proposed digital taxes appear poorly de- by all countries) are transposed into domestic laws and
signed and patchy, a hasty attempt to meet the hunger for international tax treaties.
tax revenues felt by most countries. On the contrary, the
European Union seeks a more thoughtful and coordinated Whatever the final outcome of the OECD projects, what
tax approach. matters the most is that the players of the global digital
industry are served with definite and stable tax rules, espe-
That is why the European Commission put forward, in cially in such a period of prolonged economic uncertainty.
early 2018, a proposal for a framework of rules to best reg- ••
ulate digital service taxes in Europe (“an interim tax which
covers the main digital activities that currently escape tax
altogether in the EU”). Furthermore, the European Com-
mission also proposed reforming corporate tax rules so that
profits are taxed where businesses have significant interac-
tion with users through digital channels. The latter is the
European Commission’s preferred long-term solution.

We have already expressed our concern regarding digital
taxes in the article, “Will the “temporary” EU Digital
Service Tax hit online merchants?” published on issue
06/2018 of Cross-border Magazine. On that occasion, we
highlighted essential downsides of digital service taxes:
that the foreign multinationals targeted by such measures
may easily translate the additional tax burden into higher
advertising and service fees for local business customers
(e.g., online merchants, advertisers, etc.), who already pay
hefty corporation tax in the country.

Alan Rhode is a co-founder at Taxmen, the one-stop-shop for legal and tax services to the e-commerce industry.

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