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European Parliament Votes in Support of New Corporate Digital Tax

Updated: Apr 9, 2018

Earlier this year the Director General of Taxation and Customs Union from the European Commission, Stephen Quest, hinted at a new corporate digital tax to come in March 2018. Quest acknowledged that although the need for modernizing the current EU tax system is by no means a new issue, its importance has grown rapidly in the past few years due to the development of the Digital Single Market and the growing presence of global digital companies. Corporate tax matters, according to the Treaties, are national competences in the EU.

On 15 March 2018, the European Parliament’s plenary voted with overwhelming majority to support the realization of both the Common Consolidated Corporate Tax Base (CCCTB) and the Common Corporate Tax Base (CCTB). It must however, be noted that the seven national parliaments have expressed reservations due to the nature of the proposal, mainly for tax jurisdiction related reasons. Combined, the two would create a modern tax system adapt to the 21st century global and digital economy.

Previously, companies were taxed based off of physical presence, but as more and more companies transitioned to a purely digital presence, this mode of taxation became obsolete. In addition to geolocation, the transition to the digital economy also possessed a problem as the EU had to establish a basis for the economic value of data.

The new tax framework takes these questions into account, as it aims at creating a single, clear and fair EU corporate tax systems that uses benchmarks to determine firm’s digital presence, that is, the center of their activity. Firms will continue to be taxed where they earn their profits, however now digital presence will be included even if the firm does not have a fixed place of business in the country they make a profit within.

Another benchmark to be added will concern the use of personal data in the tax bill formula. The Commission is urged to monitor the use of digital contracts, personal data, and the volume of digital data collected for data-mining purposes in order to better capture the exact profits of a firm to determine where it should be taxed (the so-called “data factor”). Currently personal data is not considered in the calculation of tax liabilities even though it is highly valuable asset used by large firms such as Facebook, Amazon and Google, and essentially, all digitally active companies in the Silicon Valley.

In order to prevent confusion and fragmentation of the new tax system, the framework would allow firms to calculate tax bills by combining all profits and losses within the EU Member States and then have the taxable profits allocated to each Member State that the firm operates within. By creating a ‘one-stop shop’ for taxation, firms will no longer have to deal with 28 different sets of national rules as well as be prevented from moving their tax base to low-tax jurisdictions.

This new corporate taxation system is just one of many examples of how the European Union plans to develop and modernize alongside business within this Digital Era.

The legislative resolution is now discussed in the Council, where EU member states have to approve of the final text. This is expected to be a heated debate because mainly small countries could be seriously hurt by the new rules. Ireland, Belgium, Luxembourg, The Netherlands have all used the “sweetheart deals” to attract global companies to their jurisdictions. Such preferential transfer pricing arrangements may have to come to an end once the CCCTB becomes the standard.



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