Out-Law / Your Daily Need-To-Know

The European Commission is asking for views on an EU-wide digital levy to "help address the issue of fair taxation related to the digitalisation of the economy".

The new levy is not intended to interfere with the ongoing work at the G20 and Organisation for Economic-Cooperation and Development (OECD) level on a reform of the international corporate tax framework, according to the Commission.

The Commission does not set out precise proposals in its 'roadmap' for initial feedback or its more detailed public consultation. It states that the levy could take the form of 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; or a tax on digital transactions conducted business-to-business in the EU.

The fact that the European Commission is resurrecting some form of EU digital tax suggests that it is not confident that international agreement on the OECD proposals will be reached this year

It says the proposed levy would cover digital services, including social media, online market places, and other online platforms that operate in the EU. The consultation asks for views on what online platforms should be caught, asking about a range of activities including price comparison websites, online gaming, streaming services, online news outlets, standardised online teaching and sales of physical goods or services.

The digital levy is one of the proposals from the Commission in response to a request in July 2020 from the European Council for proposals for generating additional resources to support the EU’s borrowing and repayment capacity. The Commission expects to produce a proposal for a Directive for the introduction of a digital levy during the first half of 2021 with a view to the levy being introduced on 1 January 2023.

A digital levy is proposed because the Commission says that "lower taxes or even no taxes at all, paid by companies engaged in the digital economy weaken the sustainability of public finances". It says this is "particularly blatant" at a moment when the EU and member states are facing a greater fiscal and debt burden as a result of the Covid-19 pandemic.

Members of the public and businesses can give initial online feedback on the Commission's proposals until 11 February or participate in a more detailed online consultation until 12 April.

The OECD was asked by the G20 to come up with proposals for addressing the tax challenges of the digitalisation of the economy by the end of 2020. In October 2020 it published detailed 'blueprints' for reform, but said that international agreement on the way forward was not now expected until the middle of 2021.

"The EU wishes to ensure that the challenge of taxing the digital economy will be dealt with in a timely manner. The fact that it is resurrecting some form of EU digital tax suggests that it is not confident that international agreement on the OECD proposals will be reached this year," said Valérie Farez, an expert on French tax at Pinsent Masons, the law firm behind Out-Law.

The EU Commission had proposed an EU wide digital tax back in 2018 but this was opposed by countries such as Ireland, Luxembourg and the Nordic countries, who feared it would lead to a reduction in their revenues. EU finance ministers agreed in March 2019 to concentrate on the OECD's project and to leave the EU proposal in reserve should the OECD not manage to secure timely international agreement.

"One of the difficulties in reaching international agreement on the OECD proposals has been the fact that the US considers that taxes aimed at digital companies unfairly target US-owned tech multinationals," Valérie Farez said.

"However, the longer it takes to reach international agreement, the more uncertainty international companies will face. There are already proliferations of unilateral digital taxes which increase compliance costs for multinationals and make double taxation and a distortion of competition more likely. Whilst an EU-wide levy would at least standardise the tax within the EU, this does not solve the problem as non-EU countries such as the UK, Brazil, Indonesia, India and Turkey have introduced or are contemplating their own digital taxes," she said.

Over the last few years, several EU countries, including France, Italy and Austria have introduced their own digital services taxes (DSTs) and the Czech Republic and Spain are proposing to do so.

France resumed collection of its 3% DST at the end of last year. The collection of the tax had been paused after the US threatened to impose 100% tariffs on champagne and a number of French luxury goods.

In a report published last month the US Trade Representative's Office (USTRO) considered the EU's previous proposal in relation to a DST and noted that the EU was again considering a digital levy.

"USTR is concerned that the EU may take an approach to digital services taxes that could be discriminatory, unreasonable, and burdensome and restrictive to US commerce," the USTRO report said. It said the USTRO will monitor any future EU DST proposal.

The report said that any EU DST proposal that involves revenue thresholds may be discriminatory against US companies because it may remove many smaller EU-based companies from tax liability, while focusing the tax burden on large US firms. if the tax only targeted digital services the USTRO said it could inordinately impact US companies, because US companies are global leaders in the digital services sector.

In another report published in January the USTRO found that the UK's 2% digital services tax discriminates against US digital companies, is inconsistent with the principles of international tax and burdens or restricts US commerce. The UK tax applies from April 2020 to the UK-derived revenue of large social media platforms, search engines and online marketplaces.