January 25, 2021
The Commission says that the EU needs a modern, stable regulatory and tax framework to respond to the developments and challenges of the digital economy. While digitalisation should be promoted and encouraged, as it can increase productivity and benefit consumers, digital companies should also contribute their fair share to society, the Commission says.
The aim behind the digital levy initiative is to introduce a fair digital tax to address the issue of taxation of the digital economy. A fair and competitive digital economy is one of three strategic priority areas in the agenda on Shaping Europe’s Digital Future. This means ensuring that EU rules, including in the area of taxation, are fit for purpose in the digital economy, and that companies compete in Europe on fair terms.
The new initiative aims to mitigate distortions and fragmentation of the EU single market resulting from an uneven playing field between operators in the digital sector and other sectors of the economy. The Commission says that action at EU level can help reduce these risks and strengthen the single market for digital activities, in line with the Digital Services Act package.
The legal basis of a digital levy will depend on the final design of the initiative. Both Article 113 (harmonisation of indirect tax rules to ensure the functioning of the internal market) and Article 115 (harmonisation of other tax rules to ensure the functioning of the internal market) of the Treaty on the Functioning of the European Union (TFEU) are relevant, either separately or combined.
The baseline scenario will take account of developments at international level. The Commission will identify additional policy options, such as:
- 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;
- tax on digital business-to-business transactions in the EU;
- scope and definition of digital activities/transactions or companies subject to the initiative;
- the relationship between the EU’s and Member States’ international obligations, including interaction with Double Taxation Conventions. The initiative must also comply with the rules of the World Trade Organisation;
- fairness considerations: the design of the initiative must take into account the possible impact on small and medium-sized enterprises (SMEs), digital companies with a dominant/weak market position, or consumers of digital content or goods;
- potential behavioural reactions: it will be important to design the initiative in such a way as to mitigate against incentives to avoid payment of the new tax/levy; and
- forward-looking design: the design of the measure should take into consideration the future evolvement of the digital economy with a view to putting in place a sustainable tax framework and providing tax certainty for businesses.
The roadmap set out in the Inception Impact Assessment is open for consultation until 11 February 2021. The Commission has also launched a public consultation on the digital tax levy (see item below). To access the Inception Impact Assessment, click here.