On May 15, 2018, TEI submitted a letter to the European Commission commenting on its proposals to impose a digital services tax and define the concept of a "significant digital presence" for corporate income tax purposes. TEl's comments emphasized the need for the Commission to coordinate its "digital economy" tax proposals with broader multilateral organizations such as the OECD, and to provide greater definition and clarity to the new concepts set forth in the proposals. TEl's comments were prepared under the aegis of the Institute's European Direct Tax Committee, whose Chair is Giles Parsons. Benjamin R. Shreck, TEI Tax Counsel, coordinated the preparation of TEl's comments.
The European Commission released two proposed council directives on 21 March 2018. The first proposal would impose an interim tax on revenues derived from the provision of certain digital services (the Digital Services Tax Proposal). The second proposal would define the concept of a "significant digital presence," which would be used to impose corporate income tax on multinational enterprises doing business in the EU but do not have a physical presence in the EU, or only have a physical presence in certain EU Member States (the Digital Presence Proposal; together with the Digital Services Tax Proposal, the "Proposals"). Both Proposals invite input from relevant stakeholders regarding the substance of the proposed directives by 16 May 2018. (1) On behalf of Tax Executives Institute, Inc. (TEI), I am pleased to respond to the EC's request for input on the Proposals.
TEI was founded in 1944 to serve the needs of in-house tax professionals. (2) Today, the organization has 57 chapters around the world, including one in Europe. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting fair tax policy at all levels of government. Our nearly 7,000 members represent 2,800 of the largest companies in Europe, North and South America, and Asia. TEl's members work for companies operating across all industries and thus we believe our perspective brings a balanced view of how the Proposals may impact companies operating both inside and outside the "digital economy."
TEI commends the EC for its invitation to stakeholders to comment on the Proposals. TEI appreciates the opportunity to participate in the process by which the EC addresses the challenges represented by the digitalization of the economy as reflected in the Proposals and their accompanying documents. TEI previously submitted comments in response to the EC's consultation regarding the fair taxation of the digital economy (3)
As a threshold matter, we question whether the "digital economy" or "digitalization of the economy" requires the EU to adopt distinct tax rules for "digital transactions" or propose a new definition of permanent establishment (PE) for a "significant digital presence." As we have noted in other submissions, and as the OECD stated in its 2015 final report on Action 1 of its base erosion and profit shifting (BEPS) project, (4) the digital economy is the economy and attempts to "ring-fence" digital companies or transactions are likely to fail. Despite its previous conclusion, however, the OECD subsequently set forth options for taxing the digital economy in an interim report on the subject. (5) Thus, despite our view that a special tax regime is unnecessary to address digital economy challenges, the general trend of multinational bodies, as well as certain countries, appears to be toward implementing a special digital tax regime.
Given this trend, from TEl's perspective it would be preferable for the EC to work with the states comprising the OECD's Inclusive Framework on BEPS to devise a uniform multilateral approach to any tax issues raised by digitalization. Unilateral measures adopted by individual countries outside of multilateral cooperation would almost certainly result in double taxation and unduly inhibit the growth of the taxed industries, to the detriment of consumers and businesses alike. Addressing tax issues arising...