The impact of digitalisation on corporate taxation
The digital revolution
Over the past years, the rapid technical development in form of digitalisation has led to dramatic economic upheavals. A glance at company rankings makes this quite clear. In 2006, Microsoft was the only digital technology company among the Top 20 with regard to market capitalisation. Eleven years later, in 2017, already 9 of the digital technology companies are among the Top 20, whereby the first four places are occupied by Apple, Alphabet (Google), Microsoft and Amazon, all of which have to be assigned to the digital economy.
The tax consequences of digitalisation
100 years have passed since the rules for international corporate taxation were created for the conditions, on which the then economy was based. It is quite obvious that these regulations are no longer fit for purpose and the media is full of examples that show how easy it is for internationally active companies to minimise their tax burden. This is particularly true for the digital economy and its particularities. Immaterial assets, which play the key role in the digital world, can be easily moved to any place on the globe. Production sites in the classic sense of the word are becoming obsolete and due to online sales, end consumers increasingly shun local outlets in the sales markets. These companies have no problem to shift their profits to tax havens and low-tax countries. Hence, it is of little surprise that the effective tax burden of companies belonging to the digital economy is on average only 9%, thereby amounting to less than half of the tax burden of the traditional economy. In individual cases, companies have been able to reduce their tax burden to almost 0%.
Plans of the Commission for fair taxation of the digital economy
The OECD has already discussed in great detail the fiscal challenges of digitalisation within the scope of the so-called BEPS Project. A new report on the subject has been scheduled for publication in spring 2018. The EU Commission has also reacted to this development and finally published the Communication: “A Fair and Efficient Tax System in the European Union for the Digital Single Market” (COM(2017) 547 final from 21.9.2017) on 21.09.2017, in which it announces its intention to present measures on taxing the digital industry by spring 2018. In doing so, the Commission pursues a two-pronged strategy. The Commission holds the long-term opinion that the already available proposals for a Directive on profit taxation (Implementation of the Common Consolidated Corporate Tax Base) is a suitable instrument to overcome the challenges posed by the digital economy. According to the Commission, it will not be a problem to include any necessary amendments (e.g. implementation of the digital production site).
In order to achieve short-term successes, the Commission also intends to introduce measures, which can be speedily implemented, for example an extra charge on VAT for online trading, a source tax for digital transactions or an EU-wide advertising levy. The Estonian EU Presidency hopes to have solved these issues by the end of the year and to have finally achieved agreement in the Council, which will serve as the basis for the announced legislative proposals by the Commission by spring 2018.
Plans of the Commission under close scrutiny
The proposed measures are long overdue and it is now important that these measures are indeed implemented. Due to the fact that a speedy implementation of the Common Consolidated Corporate Tax Base is not to be expected, it is not only positive but also urgently required that the Commission considers measures, which can be quickly implemented, such as an EU-wide advertising levy. Apart from that, it also shows that in the medium to long run a comprehensive reform of international corporate taxation is absolutely essential. In the end, one will only be able to get a grip on the tax avoidance strategies of Internet giants, when the EU at last implements the Common Consolidated Corporate Tax Base in combination with a minimum tax rate on company profits.