Facebook, Google, Alibaba and others beware
Shareholders of Facebook, Google, Alibaba and others should tremble, the European Union (EU), including the European Economic Union (EØS) are about to impose Digital Services taxes.
The Independent Commission for the Reform of International Corporate Taxation ( ICRICT) welcomes the proposal by the European Commission to introduce a digital services tax, aimed at addressing the tax challenges of the digital economy as part of a fair and efficient tax system in the European Union.
A digital services tax on the provision of certain digital services is an appropriate interim measure to ensure that until real global or regional reform take place, the EU national tax bases are not further eroded and social fairness is preserved.
The ICRICT also concur that the momentum in reform should be maintained, as digitalisation has exacerbated the unsuitability of current international tax rules, accentuating the need to change them.
The OECD/G20 Base Erosion and Profit Shifting (BEPS) reform proposals, while helpful at the margins, do not help resolve the basic challenge of ensuring that multinational enterprises (MNEs) are taxed ‘where economic activities occur and value is created’. In particular, they failed to address the crucial issue of criteria for apportionment of profits.
The transfer pricing rules attempt to construct prices for the transactions among entities that are part of MNEs as if they were independent, which is inconsistent with the economic reality of a modern-day MNE, a unified firm organized to reap the benefits of integration across jurisdictions. Large MNEs, including those operating in the digital economy, are oligopolies and in practice there are no truly comparable independent local firms that can serve as benchmarks.
The ICRICT recommends an alternative to taxation of all multinationals, including those which operate in the digital economy: tax multinationals as single firms by combining their global profits and then allow each country where the corporation operates or sells goods to tax only the portion of profits attributable to the corporation’s economic activity there.
– A digital service tax is an appropriate interim step until a global reform of the way multinationals are taxed is on the table. It has been clearly shown that digitalization is not restricted to a specific group of companies, but affects the whole economy; this means that a new comprehensive approach is required, one that abandons the fiction of transfer pricing and separate entity taxation, says José Antonio Ocampo (ICRICT chair)
– addressing the issue of digital companies not paying their fair share of taxes is much welcomed and necessary. Digital multinationals have for years been avoiding significant tax revenue in the EU, through exploiting the current inefficient taxation rules, Says Norwegian national and ICRICT Commissioner Eva Joly.
– The interim step – the digital service tax – shall however not further delay the adoption of a long-term and more robust solution for taxing the digital economy, i.e. the CCCTB reform with a revised definition of a ‘permanent establishment’ that the EU Parliament voted for last week. (Common Consolidated Corporate Tax Base, CCCTB)
© ICRICT / #Norway Today
ICRICT is a non-profit group of economists, tax experts and former senior officials which works to promote debate on reform of international corporate taxation, in the global public interest. The latest report, “A roadmap to improve the the rules for taxing multinationals” is found here.