The digital economy - opportunities for entrepreneurship and taxation
The report on Taxation of the Digital Economy, released by a High Level Expert Group on 28 May, presents an important challenge for tax systems and governments: to balance the need to encourage a vital sector of Europe's economy with governments' wishes to crack down and tax avoidance and tax evasion.
The group began its task to assess the challenges and opportunities in taxing the digital economy five months ago. The report's findings and recommendations provide some food for thought.
It was at the May 2013 European summit that EU leaders pointed to a need to respond to the challenges of taxation in the digital economy.
The report, produced by the independent experts, covers taxation issues linked to the digital economy in the broadest sense. It looks at indirect (VAT) and direct (corporate) taxation, as well as the wider issues of how tax policy can help maximise the opportunities that the digital economy offers.
The expert group sees digital technology as offering great opportunities for Europe in terms of jobs and growth. At the same time, it sees digital technology as the means to strengthen the fight against tax evasion and avoidance, while lowering administrative and enforcement costs.
The 'win-win' situation would see a tax system capable of collecting tax revenues effectively while at the same time enhancing entrepreneurial risk-taking.
The report's main findings are that
- the digital economy does not require a separate tax regime;
- that digitisation greatly facilitates cross border business;
- that Europe's upcoming move to a destination-based VAT system for digital services be expanded to all goods and services (in business-to-consumer transactions) in the future;
- VAT exemption should be removed for small consignments from non-EU countries, to provide a level playing field for EU business;
- that the G20/OECD Base Erosion and Profit Shifting (BEPS) project are fundamental to tackling tax avoidance and aggressive tax planning globally;
- that priority areas within the BEPS project should be countering harmful tax competition, revising transfer pricing rules and reviewing the concepts for defining and applying taxable presence;
- that the Common Consolidated Corporate Tax Base provides an opportunity for the EU to expand on new international standards (such as transfer pricing profit split methods) and achieve additional simplification within the EU;
- and that more radical reforms of the tax system could be looked at in the longer term, including a destination-based corporation tax.
The Commission will now look at the report and decide on policy orientations.
Clearly the issue of fair taxation has gained importance as the economic crisis focuses increasing attention on public finances.
One assumes that the main concern of governments is how tax administrations can best adapt their tax systems to the online world, with a view to a united EU approach to tackling tax evasion. And digitisation provides solutions for simplification, transparency and innovation in the taxation area.
But it is important that governments, and the Commission, see the digital challenge not just from the perspective of a united and tighter EU tax regime for online services.
A fast and growing digital sector is crucial to the European economy's future prospects. It must not stifle a growth of exciting opportunities for entrepreneurs and for people in general.
