The European Commission (EC) is pushing ahead with plans to create a ‘Digital Single Market’ (DSM) by tearing down regulatory barriers to cross-border e-commerce. At the same time, the Organisation for Economic Co-operation and Development (OECD) and the G20 are moving forward with their Base Erosion and Profit Shifting (BEPS) project. Both initiatives could – or should – result in changes to tax rules and red tape, with knock-on effects for businesses inside and outside the European Union. However, the approach is uncoordinated, fails to address some fundamental tax barriers to a DSM, and in some cases, could make matters worse, not better.
Why the attention?
Creating a DSM is a high priority for the EC, which estimates that this could create up to €415bn in additional growth and hundreds of thousands of new jobs. However, cross-border digital sales between EU businesses are currently exceedingly limited. According to EC figures, the largest share of the European digital market is held by US-based online services (accounting for 54%), followed by national online services (42%). EU cross-border online services represent only four percent of digital sales. Barriers – including tax barriers – have been identified as impeding intra-EU digital trade, and the EC is therefore proposing to streamline the VAT registration requirement for digital sales in the EU.
Separately, international governments and tax authorities have become increasingly concerned about the ability of current corporate income tax rules to cope with the digital economy. International corporations have proved able to generate significant sales outside their domestic market, without necessarily paying correspondingly large corporate income taxes in those locations where they generate value. Such concerns have triggered initiatives such as the BEPS project. However, this is likely to increase the corporate tax compliance burden faced by e-commerce, and unlike with VAT, the EC is not proposing anything to streamline this within Europe.
This paper considers the tax implications of the EC’s DSM plan for Europe and the BEPS initiative. It focuses in particular on:
corporate income tax;
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