Grant Wardell-Johnson and Andy Hutt discuss European Commission and OECD plans for cross-border coordination in taxing the digital economy.
In the last week both the European Commission and the Organisation for Economic Co-operation and Development (OECD) have announced the next phase of their plans for cross-border coordination in taxing the digital economy.
On 16 March, the OECD released its interim report “Tax Challenges Arising from Digitalisation”. This report reflects consensus achieved between more than 110 member countries, and recognises that the existing tax framework has two key features requiring change in order to adequately address the digital economy. These are:
There is not yet consensus among OECD members about exactly how these features should change, and what interim measures countries may adopt pending the OECD’s target of achieving a consensus-based long-term solution in 2020. The OECD also notes that some of its initiatives to combat base erosion and profit shifting (BEPS) are already resulting in certain multinational enterprises changing their structure to improve alignment with their real economic activity.
On 21 March, the European Commission released its package of proposals for a “Fair and Effective Tax System in the EU for the Digital Single Market”. The package includes proposals that the European Council should issue two directives on the taxation of the digital economy, such that:
The logic behind the European Commission’s proposal is that significant value can be created by the interaction with, and contributions to certain digital platforms by residents of a member state. Therefore applying the principle that tax should arise in the jurisdiction in which value is created, it is appropriate for the platform to pay tax in member states where its users live.
In order for the proposals to take effect, consultation must first take place with the European Parliament. The European Council would then need to unanimously adopt the final directive wording in order for it to take effect.