Corporate Taxation in the Digital Era

As the general economy transitions from a physical to digital presence while simultaneously maintaining an economical presence, the EU is faced with the growing problem of an outdated tax system. The two major questions the EU faces in the modernization of the current tax framework is where to tax and what to tax. Previously, companies were taxed based off of physical presence, but as more and more companies transition to a purely digital presence, this mode of taxation becomes obsolete. In addition to geolocation, the transition to the digital economy also posses a problem as the EU must establish a basis for the economic value of data.

During a recent workshop, Stephen Quest, Director General of Taxation and Customs Union from the European Commission, explained that digital taxation is not a new issue, but its relevance to the EU is rapidly growing. The importance and need for digital taxation stems from four main concerns.

The first is the need for fairness across Member States, as many Member States have expressed frustration with their lack of ability to tax a digital company that operates from another country but whose main source of revenue comes from doing business within their own borders. The need for sustainable revenues was voiced as well, because if digital profits cannot be taxed, then gaps in revenue are bound to emerge and effect the revenue basis. This in turn effects competitiveness, as a digital tax is required for the single market in order to create minimal obstacles for young competitive companies to develop and grow. The final issue was that of the need to safe guard the single markets, as Member States grow restless with frustration, the EU runs the risk of a patchwork of national solutions developing out of desperation, causing loop holes and “digital spaghetti.” Mr. Quest remarked that due to this demand from Member States, the European Commission has been working on a digital taxation proposal which is set to be presented this coming spring 2018. There was heavy emphasis on the need for immediate target measures to be undertaken, as a digital tax must exist at an international level in order to succeed.