Fair taxation of the Digital Economy

Fair taxation of the Digital Economy – European Commission publishes communication to the European parliament and Council

Days after taxing the digital economy took centre stage at the informal ECOFIN meeting in Estonia, the European Commission published its communication to the European Parliament and Council entitled, ‘A fair and Efficient tax System in the European Union for the Digital Single Market’.

The Communication provides detailed analysis of the digitalisation, its growing impact on the economy, and new business models emerging in the digital economy. It highlights the effective average tax rates paid by traditional business models versus the newer digital business model.

The Communication identifies two main policy challenges when seeking to tax the digital economy, nexus and value creation, i.e. where to tax and how best to tax.

The Commission Press Release focuses attention on the CCCTB framework as the optimal means by which to address the tax challenges that arise from the digital economy in the context of the   revised permanent establishment rules and the use of formulary apportionment for allocating the profit of large multinational groups. In addition, the Communication states that “There is scope within the current CCCTB proposal to examine further enhancements to ensure that it effectively captures digital activities”.

The Communication outlines 3 options which should be considered as short-term solutions.

  1. Equalisation tax on turnover of digitalised companies

This is envisaged to be a tax on all untaxed or insufficiently taxed income generated from all internet-based business activities, including business – to – business and business-to-consumer, creditable against the corporate income tax or as a separate tax.

  1. Withholding tax on digital transaction

The communication states that this would constitute a standalone gross-basis final withholding tax on certain payments made to non-resident providers of goods and services ordered alone.

  1. Levy on revenues generated from the provision of digital services or advertising activity

The possibility of applying a separate levy to all transactions concluded remotely with in-country customers where a non-resident entity has a significant economic presence.

The Estonian Presidency is pursuing an ambitious timeline for conclusion, with the Finance Minister stating that they are aiming for agreement to be reached by the December ECOFIN meeting.



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