Tax jurisdictions around the world are feeling the pressure to update their rules to keep pace with the disruptions brought about by the digitization of the economy. Defining where value is created has become much more complex than when most countries' corporate tax rules were written.
Traditional corporate tax rules largely do not account for the realities of the modern global economy, for two reasons: 1) they do not capture business models that profit from providing goods and services online to customers within a jurisdiction without being physically present under traditional permanent establishment (PE) rules; and 2) they fail to recognize the evolving role that users play in generating value under these newer business models.
With such disparity between value creation and where taxes are paid, many countries are taking unilateral action to reform their corporate tax rules so profits are registered and taxed where businesses have significant interaction with users mrough digital channels--and it is time that multinational enterprises (MNEs) take notice. Notable tax legislation changes are occurring globally that will have a considerable impact on businesses.
The European Commission (EC) recently proposed new rules to ensure that digital business activities are taxed fairly in the European Union (EU). The first proposal includes a long-term initiative aimed at reforming corporate tax rules so profits are registered and taxed where businesses interact significantly with users through digital channels. The second proposal responds to calls from several EU member states for an interim tax, which covers the main digital activities that currently escape tax altogether in the EU Under this proposal, the interim tax would apply to companies with total annual worldwide revenues exceeding [euro]750 million and EU taxable revenues exceeding [euro]50 million.
The proposals will be submitted to the Council of the EU for adoption and to the European
Parliament for consultation. The EU will continue to contribute actively to global discussions on digital taxation and will push for international solutions. Although several EU member states (e.g., the Netherlands) oppose the EC proposals, a clear majority do not, so they will likely be enacted.
Due to the push for EU-level measures, the Organisation for Economic Co-operation and Development (OECD) announced that it may accelerate the release of its own final report on digital taxes...