In the aftermath of the 2008 financial crisis, concerns about how to shape a fair, or a fairer society have been at the heart of the political debates in Europe. While the effects of economic and monetary policies in doing so were to a large extent already monitored by means of public opinion, awareness of how tax systems could also impact communities grew consistently as tax scandals continued to hit the headlines. In Europe, the realization that failing to collect tax revenues fairly also meant less finance for social welfare and the redistributive policies that had constituted the basis of the continent’s social model since the nineteenth century polarized the debate even further.
The EU positioned itself as a front runner in implementing the OECD’s BEPS Action Plan
At the international level, the shift in mindset crystalized in 2013, when the OECD kicked-off the BEPS action plan with the explicit objective of addressing tax avoidance and aggressive tax planning. In this context, Europe’s unique social, political and economic circumstances led the European Union to position the block as a front runner in the fight against abusive practices and to actively advocate a fairer international tax system. As the OECD delivered reports on the 15 action points initially identified, the EU continued to lead the way in implementing the organization’s recommendations and rapidly adopted two Anti-Tax Avoidance Directives (2016-2017), as well as legislation ensuring the automatic exchange of tax rulings (2015), country-by-country reports (2016) and cross-border arrangements (2018). In September 2017, the EU took a step further and decided in the wake of the G20 mandate to revisit earlier discussions on the challenges raised by the digitalization of the economy. However, it became clear quickly that despite numerous debates and a strong political will to advance the topic, no agreement could be reached on the Digital Services Tax (DST) proposed by the European Commission. In March 2019, the EU Finance Ministers recognized that they had been unsuccessful in finding a common solution to tax the digitalized economy. Meanwhile, discussions at the OECD level had found a new impetus, culminating in the publication of a work program in May 2019, with the commitment to work toward a long-term solution by the end of 2020.
Different national priorities have meant the Member States do not have a common approach on the issue of taxation and the digitalization of the economy
It is somewhat surprising that Member States failed to achieve consensus, in light of such a strong political momentum. One of the most obvious justifications for this setback lies in the EU’s unanimity voting system for tax files, which requires that all Member States agree on the proposed legislation. It is nonetheless manifest that this very same constraint did not prevent the adoption of previous legislation on tax transparency and anti-avoidance. The heterogeneity of the EU at the political and economic level partially explains why – in this case – the diverging interests of the individual Member States could not be reconciled. In the first phase of the BEPS program, the fight against abusive tax practices had represented a relatively consensual banner behind which European countries and most nations worldwide could rally, in particular as it benefitted from the support of the OECD as a global organization. On the contrary, the debates concerning how to tax the digital economy and the underlying idea that this could lead to a relocation of the taxing rights between market and residence jurisdictions further exacerbated existing bones of contention between countries. Germany that had initially supported an “equalization tax” on the turnover generated in Europe by digital companies, quickly assumed a less partisan position, as the US investigated possible retaliatory measures. Smaller countries like Sweden or Finland warned that the DST would breach Member States’ international treaty obligations and introduce double taxation issues. At the other end of the spectrum, France, ardent proponent of the DST, claimed that the tax was necessary to restore a level playing field with the “brick and mortar” economy.
The tension inherent to the EU’s desire to become a standard setter for fair taxation despite its inability to act as a cohesive group on digital taxation resulted in an ambiguous position for the Union and its Member States. In March 2019, the EU Finance Ministers decided to focus their efforts on finding a compromise at the OECD level, although they refused to adopt a common position that would allow Europe to present a unified front in the international fora. They further insisted that the EU would stand ready to revisit the EU DST proposals if no global consensus could be secured by the end of 2020. In the meantime, most Member States continued promoting European views at the OECD level with relative success. Pillar 2 of the consultation paper published in January 2019 thus included proposals supported by France and Germany, while the significant user participation proposal under Pillar 1 was championed by the UK.
A growing number of EU countries look likely to introduce unilateral digital taxes
As the EU Member States’ efforts to influence the OECD work clearly illustrates the EU’s ambivalence, it is likely that their diverging political agendas and interests will further impact the way Europe addresses digital taxation in the future. The dematerialization of the economy has sharpened the perception European consumers have of their data’s value for digital multinationals. As a consequence, political leaders have increasingly embraced the argument that the economic and demographic weight of the EU market should be reflected in how taxing rights are allocated within the international corporate income tax system. Governments in Austria, France, Italy, Spain or the UK notably presented legislative bills with the objective of taxing the digital services performed within their jurisdiction, irrespective of the supplier’s lack of physical presence there. Most of these proposals have not been enforced yet, and many are intended as temporary measures. However, it is interesting to observe how a growing number of European countries stand prepared to unilaterally implement turnover taxes with little regard for coordinating rules, should the international community fail to deliver a viable solution. In that respect, one can wonder to which extent these governments will be willing to accept an outcome that they consider would not appropriately address their concerns. French Finance Minister Le Maire recently hinted that a solution which would fail to capture the value of data would not be satisfactory.
Will the work of the Inclusive Framework reinvigorate EU wide solutions such as the proposal for a significant digital presence concept or the common consolidated corporate tax base?
All eyes are now turned towards the OECD and the expectation that the Inclusive Framework will be able to deliver a long-term solution that all participating countries can agree on by the end of 2020. In that respect, the OECD Secretariat’s proposal for a “unified approach” under Pillar 1 released in October 2019 has so far received a relatively warm welcome by the jurisdictions contributing to the discussion. While the prospect of an EU-wide DST moves further away, it will remain crucial to watch how the EU reacts to international developments.
Although Germany and France are supporting the introduction of coordinated income inclusion and base eroding payment rules, it is still unclear whether other Member States will be ready to accept the concept of a minimum level of taxation at the EU level. As an alternative, one could imagine that the OECD work on original profit allocation methods and the possibility of using apportionment formulas may trigger renewed interest in the European Commission’s proposals for a digital presence and a common corporate tax base.
Irrespective of the outcome, it seems increasingly likely that once a global solution has been agreed upon, it will still be necessary to persuade those governments and public opinions supporting DSTs that the approach chosen not only adequately address their fairness concerns but also match at least the immediate benefits offered by the levies that will have already been implemented at that time.
Marie Audrain is a Senior Manager with more than 10 years working experience in International Tax law.She works with KPMG’s EU Tax Centre and specializes in all aspects of corporate direct taxation law at the EU level.Marie graduated from HEC Paris and has a Master's degree in International Tax law. Marie was a member of KPMG Luxembourg’s tax practice for...