HomeInsightsEuropean Commission publishes Communication on A Fair and Efficient Tax System in the European Union for the Digital Single Market

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The Commission has launched a new EU agenda for fair taxation of the digital economy.

The Communication describes the challenges Member States are facing when taxing the digital economy and trying to ensure that profits are taxed where they are earned.

The Commission says that the EU needs a common and coherent approach when taxing the digital economy. The approach must be in line with the aim to complete the Digital Single Market, to support growth and ensure fair and effective taxation.

The issue is urgent as a number of EU countries have already introduced unilateral measures, the Commission says, and divergent national approaches can fragment the Single Market and increase tax uncertainty. They can also destabilise the level playing field and open new loopholes for tax abuse and corporate tax avoidance.

The Commission wants to apply a simple principle: companies should pay tax where their real economic activity is taking place. Profits earned in the EU should be taxed in the EU. This principle should apply to both companies with traditional shops as well as digital businesses that make high profits in Europe without necessarily having a physical presence here.

Therefore, the Commission explains, the thinking applies not only to taxing digital companies, but more broadly to dealing with tax in an increasingly digitalised economy.

At EU level, the Common Consolidated Corporate Tax Base proposal offers a basis to address key challenges, for example by further adjusting permanent establishment rules. The Commission proposes to examine enhancements to these rules to ensure that they effectively capture digital activities. However, this may take time, given its complexity, and the digital economy will not stop growing in the meantime. Therefore, the Commission says that it will also look at other short-term options to tackle specific tax challenges.

The Communication offers several possible options, such as an equalisation tax, a levy on internet ads or withholding tax on internet transactions. However, the Commission says, it is clear that there are still a lot of questions to be answered before meaningful solutions are reached.

A global answer is clearly the best, the Commission says. Accordingly, the EU is working with the OECD and the G20 on these issues. The Commission aims to arrive at a common EU position on the issue by December 2017.

However, the EU must also be prepared to act in the absence of adequate global progress, the Commission says. In the coming months, it will, together with the Member States, analyse the various options.

The Commission hopes to publish legislative proposals by Spring 2018. To read Commissioner Dombrovskis’s speech in full, click here. To read the Commission’s press release and to access the Communication, click here.

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