Out-Law News | 30 May 2014 | 11:01 am | 3 min. read
EU member states including France and Germany have previously called for the introduction of a new tax regime which would prevent predominantly online companies such as Google and Amazon from taking advantage of lower tax regimes in other EU countries to pay less tax. However, in a new report for the European Commission, a group of tax experts led by former Portuguese finance minister Vitor Gaspar found that there was no need for a "special" tax regime for these companies (82-page / 2.2MB PDF).
Commission president José Manuel Barroso welcomed the report, which also backed forthcoming changes to EU law which will result in the application of VAT to digital goods and services based on the country to which they are delivered to rather than the country where the seller is located. This 'destination principle' will apply from 1 January 2015.
"With the crisis focusing attention on public finances, the issue of fair taxation has moved up the agenda, for both governments and citizens," Barroso said. "A strong and fast-growing digital sector is good for our economy, but we must also think about how best to adapt our tax systems to the online world. I welcome the report by Vitor Gaspar and the expert group, which the Commission will now study with interest and draw conclusions in due course."
The expert group was set up in 2013 to provide a broad overview of taxation issues linked to the digital economy, looking at both indirect taxes such as VAT and direct corporate taxation. In its report, the group said that "economic efficiency, distributional equity as well as efficiency and effectiveness in tax administration and enforcement" were the most important principles guiding any tax regime. For this reason, they concluded that there should not be a special tax regime for digital companies while tax incentives and credits should be "approached with caution".
"[The group] believes that digital economy offers great opportunities for Europe," it said. "Europe can boost its prospects for growth and jobs if it realises the Digital Single Market and if it taps the digital potential of the Single European Market. The group is also persuaded that digital technology offers the means to strengthen the fight against tax evasion and avoidance while, at the same time, lowering administration and enforcement costs."
The experts' recommendations were divided into three main strands. Firstly, rather than develop a separate digital tax regime, the report instead recommended that the general rules be "applied or adapted so that 'digital' companies are treated in the same way as others". Secondly, the experts felt that the "commendable" move to a destination-based VAT system for digital services could be further expanded to include all goods and services in business-to-consumer transactions, and potentially to corporation tax, in the future. Thirdly, the further removal of barriers to the Single Market was recommended.
The group said that the Base Erosion and Profit Shifting (BEPS) project, currently being worked on by the Organisation for Economic Cooperation and Development (OECD) with the support of the G20 group of leading worldwide economies, was the "only immediate practical way" to tackle global corporate tax avoidance and aggressive tax planning. It said that it was "in the best interests of the EU" to take a common position on future negotiations in this area. Priority areas for the EU within the project include countering harmful tax competition, revising transfer pricing rules and reviewing the concepts for defining and applying taxable presence, according to the report.
"A united EU approach to tackling tax evasion and a more favourable tax environment for businesses - digital and otherwise - have been our overarching goals in recent years. I am pleased that the [expert] group very much confirms that this is where our energy and efforts must be focused in EU tax policy," said Algirdas Šemeta, the EU's tax commissioner.
Tax expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said that although many of the conclusions of the expert group made sense, the ability of member states to set their own tax rates allowed them the flexibility to support their own priority areas. It was "unlikely" that moves towards unanimity would take place in the near future, he said.
"On the question of whether there should be a separate 'Google tax', as called for by some member states, the group of experts has unquestionably gotten it right," he said. "The last thing these businesses need is another tax regime, with a separate compliance burden."
"Revenue from consumption taxes, such as VAT, is rising at the same time as corporation tax take is falling, so the question of how digital sales will be taxed is going to be critical to the funding of state spending going forward," he said.