Digital tax within the EU
Taxation of the digital economy is listed as one of the priorities of the European Commission. The target is to secure just and efficient taxation of incomes of all companies operating in the EU, whereas the European Commission already stated in 2014, the contemporary international rules for taxation will have to be reshaped in order to cover new business models.
In 2015 the European Parliament asked the European Commission to submit a legislative proposal on a definition of the digital permanent establishment that would cover digital companies with the significant digital presence in the source country, along with a definition of the minimum economic substance, based on which it would be determined whether foreign companies generate incomes from digital activities in the source country, particularly in relation to the development in the field of the OECD.
The European Commission recognized that in relation to the taxation of services provided digitally two main problems arise:
- Nexus – to determine the state which is entitled to tax the services provided digitally provided the business activity is conducted exclusively online and;
- Generation of income – assignment of profits to online activities thereto, the incomes are generated thru non-tangible assets, data, and knowledge.
In order to avoid profit shifting of digital activities out of the countries, where incomes were generated that according to the European commission besides the rules against tax regulations avoidance, alternative transfer pricing approaches will be necessary. On the EU level, the European Commission even mentions the possibility to modify the proposal on the Common Consolidated Corporate Tax Base to the digital issue.
On 21 March 2018, the European Commission introduced a series of measures, which should have brought the just taxation of the digital economy in the EU. The package of measures contained a proposal on the temporary solution in a form of 3 % tax on digital services levied on revenues from certain digital activities and a long-term solution in a form of the digital permanent establishment.
In 2020, within the recovery plan of the EU after the pandemics, several new financial resources of the EU were mentioned including a possible all-European digital tax. Within the adopted EU budget, the European Commission in December 2020 was requested for a legislative proposal on the digital tax as an own financial resource of the EU. The European Commission committed itself to publish the respective legislative proposal in the first half of 2021. The European Commission confirmed that it will consider the agreement on the digital tax on the OECD level, whereas its legislative proposal would be based on one of the three possible alternatives:
- additional corporate income tax for all companies that conduct certain digital activities within the EU,
- tax on profits derived from certain digital activities within the EU,
- tax on digital transactions between companies (B2B) carried out within the EU.
It is expected that the European Commission publishes its legislative proposal on the digital tax by the end of June 2021. However, it is unclear what position towards its proposal take individual member EU states and EU trade partners, for instance the US. The European Commission estimates that the digital tax might affect 120 to 150 companies of which about 50 % is seated in the US and a third in the EU. It is well possible that the US would hinder the digital tax by reciprocal trade restrictions.
The European Commission considers the planned commencement of the digital tax no later than 1 January 2023. Several countries did not wait for the proposal of the European Commission and have already introduced the digital tax in some of its form based on the published package of measures proposed by the European Commission in 2018, for instance Austria, Spain, France, Portugal, or Italy.Slovakia extended the definition of the permanent establishment since 2019 to recurring intermediation of transport services and accommodation via online platforms, which can be considered as a first step in striving for the taxation of the digital economy in Slovakia.