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AmCham EU Speaks Out Against EU Digital Tax Proposals

Wednesday, December 6, 2017

The American Chamber of Commerce in the European Union has criticized the proposals put forward in the European Commission's recent consultation on options for new tax rules or a new tax on digital firms.

The aim of that consultation is to help the Commission to define an approach to the taxation of the digital economy. The Commission's stated goals are achieving fairer and more effective taxation, supporting public revenue, and ensuring a level playing field across businesses. It also wants the new system to support EU growth and competitiveness through the Digital Single Market.

The proposal discusses some long-term proposals that would ensure that international tax rules adopted globally maintain pace with technological development. However, the consultation also seeks feedback on the following potential short-term policy options, including for so-called "equalisation taxes":

  • A tax based on revenues generated from "digital activities";
  • A withholding tax based on payments to non-resident providers of goods/services ordered online;
  • A tax based on revenue from digital transactions concluded remotely with a non-resident entity that has a significant economic presence; and
  • A digital transaction tax that applies early in the value-creation process.

The proposals are in response to concerns that many digital firms are able to structure their affairs to minimize the amount of tax they pay in markets with high tax rates, where they undertake considerable economic activity via the web but lack activities with substance to tax liability under tax rules developed prior to the emergence of many new digital business models.

In its response, AmCham EU said, ultimately, it sees significant issues with each of the proposed options –†namely: "Double taxation, increased compliance burdens, conflicting unilateral interpretations, potential treaty conflicts, and increased taxation for low-margin, loss-making, and fast-growing businesses," which it says "will reduce rather than promote the economic boost that digitalization can procure."

"At the heart of this conversation are the fundamental questions of where and how value is created. The EU must clearly be a strong voice in this discussion and we welcome the opportunity to engage further in it," the Chamber said.

"As a preliminary step, the EU should take the time to clarify its objectives in policy rather than in moral terms, so that they can be taken into account as part of these discussions. It is then essential to take the time to establish a European and then a multilateral consensus on those issues."

"We acknowledge that it will not be as swift as deploying unilateral solutions (which may ultimately work against an international solution). The EU should have a stronger and clearer voice in this international discussion. Moving unilaterally will be eventually harmful to EU growth since the resulting lack of legal certainty at a global level adds a risk premium to each investment opportunity."

AmCham EU said it is most concerned about the turnover-based proposals, warning of the economic damage that such proposals could cause. It said: "Such levies target the turnover of digitalized enterprises without a link to either profits or the value creation in the jurisdiction where they are levied. Whilst this may or may not be an appropriate policy objective, it is not one that should be described as a corporate tax as it has no correlation to net income/profits."

"It is not clear either to us what precisely 'equalisation taxes' are intended to equalize, unless credit is granted against them. Rather, they tax gross turnover (sales). Withholding taxes poses many administrative difficulties, particularly because the obligation can only be imposed on those who have the appropriate knowledge to operate it (consumers, intermediaries, and suppliers would each face challenges in this regard). Such taxes would necessarily hit all businesses: small or larger, low- and high-margin businesses, and loss-making businesses (such as those investing for growth) disproportionately. Typically, equalisation taxes increase the local cost of goods and services. We are concerned also that such taxes may not be legal under EU law to the extent that it hinders the principle of freedom of establishment."

"Even if [deployed] solely as a backstop to evasion, turnover taxes would impose an additional administrative burden on each buyer/recipient of digital services because they would have to develop with (or deal with) new systems of collection, reporting, submission, and audit. Both withholding taxes and equalisation levies would lead to double taxation and significantly inhibit the potential to deliver economic growth of both the digital economy and the digitalized businesses in the broader economy. The EU's moves in the field of value-added tax (VAT) in this area are instructive of the difficulties that would be faced regarding split payments and/or place of consumption registration," it said.

On the proposals for a digital nexus, AmCham EU said "a move away from the internationally recognized arm's length principle, through which an analysis of the taxpayer's functions, assets, and risks is undertaken, would require new models for income attribution."

Its response in this area considers a potential change to permanent establishment rules that could potentially result in taxation in the location that a digital firm's substantial activities are based, under proposals for a new digital permanent establishment concept and the adoption of a formulary apportionment approach to allocating taxing rights relating to a group's global income among countries. According to AmCham EU, "the first significant challenge would be to identify such models. In order to remain neutral, these same models would have to be applied to all businesses. It would not be desirable to do so without undertaking significant analysis on the potential impact on the incidence of taxation (that is, who economically bears the additional taxation) and growth. Hence, we would recommend this as a prerequisite for designing the details of such a solution."

"Importantly, it would be difficult (or impossible) to confine the impact of such proposals in a principled way to the 'digital' businesses being targeted. This would imply drawing lines and consequently encourage avoidance and/or impact the development of all businesses seeking to undertake international trade."

"We question whether, in reality, it would meet the apparent underlying objective of allocating more profits to market jurisdictions. Even if such an objective were achieved between member states, no additional profits would be allocated to European countries from non-European countries because taxation treaties are based on the international tax framework (which is rooted in a threshold based on physical presence). In fact, the additional burden may discourage non-EU-headed groups from placing significant functions, assets, research and development (R&D) centers, or risks within member states, thus reducing the overall profits allocable to those countries (or the EU as a whole) under such a system. It will also have an impact on the ability of EU headed groups to invest abroad, if they face different taxations systems in and outside of the EU without treaty protection," AmCham EU concluded.