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22 Feb 2022 
Claude 
For example, many US companies moved their headquarters to EU in the past 10 years. These companies use some tax strategies like intragroup loans or transfer pricing to avoid paying tax. They also use the tax system difference between nations to avoid paying tax in both countries. Some examples of these practices include Apple, Starbucks, Fiat, MacDonald’s, Amazon and Google.
In 2014, the European Commission Expert Group on Taxation of the Digital Economy has examined the best way to tax the digital economy in the EU. Their analysis focus on three taxation principles: economic efficiency, distributional equity and efficiency in administration and compliance. Principals conclusions of this report present a good tax system as a system that minimize the effect on economic agents’ behaviour and on the international competition, that ensure fair repartition of the tax revenues and tax cost between countries, that is simple to comply with and administrate.
Concerning the corporation tax policy option, the Group said: ‘There should not be a special tax regime for digital companies. Rather the general rules should be applied or adapted so that digital companies are treated in the same way as others’.
EU policies against Base Erosion and Profit Shifting BEPS
BEPS refers to tax planning strategies used to shift profit to a lower/no tax jurisdiction thus eroding the tax base of the higher-tax jurisdiction. After the final BEPS recommendations made of 15 points action plan, the EU release in 2016 an Anti-Tax Avoidance Directive (ATAD). ATAD contains 5 compulsory anti-abuse measures and Member states should apply these measures from 1st January 2019.
Here are the 5 rules: 1- Controlled foreign company rule (CFC): to prevent profit shifting to a lower/no tax country. 2- Hybrid mismatch: to prevent double non-taxation of certain income. 3- Exit taxation: to prevent tax avoidance when companies relocates their assets. 4- Interest limitation: to prevent artificial debt arrangements. 5- General anti abuse rule (GAAR): to counteract aggressive tax planning when other rule don’t apply.
In addition of the ATAD Directive, EU has made other actions to
– Adoption of A Dispute Resolution Directive in October 2017 to solve tax disputes between Member states about the interpretation and the application of tax agreements.
– Adoption of Automatic Exchange of Information Directive that make compulsory exchange information on tax ruling.
– Signature of Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) disclosure agreements.
– Introduction of Country-by-Country Reporting to ameliorate transparency.
– Approval of the EU list of non-cooperative jurisdictions in taxation matters that includes 17 jurisdictions by the Economic and Financial Affairs Council (ECOFIN) on 5 December 2017.
In addition, publication of a 47 jurisdictions grey list. These Directives give to Member States a lot of flexibility in terms of implementation, we can already see some failing.
– Incorrect implementation of CFC rule in Poland.
– The hybrid mismatch rule focus on neutralizing negative effects rather than solve the symptoms.
– Some Member state have a domestic GAAR that cause disparities.
– Certain taxpayers still use shell companies registered in tax havens. (Paradise Papers).
In November 2017, Oxfam suggested that the EU tax haven blacklists include at least 35 countries, including 4 EU Member States: Ireland, Luxembourg, the Netherlands and Malta.
European Commission’s Directives of 21 March 2018
European Commission’s Directives proposed new rule for corporate taxation based on a significant digital presence. The Commission proposed a short-term measure – Digital Services Tax, a long-term measure – Digital PE and Profit Allocation and recommendations to Member States to put this concept in practice in their double tax treaties. NB : When Member States have double tax treaties with third countries, the proposed new rules will not apply.
Before beginning a such an ambitious reform, the Commission sent a multiple-choice questionnaire to its stakeholders: ” ⅔ : agreed that international tax rules do not allow for fair competition between traditional and digital companies ” ⅘ : supported action regarding taxation of the digital economy ” BUT more than ½: agreed that a digital tax would lead to an increase in tax disputes ” And only ½ were in favour of an interim solution. “nMS also question whether it would slow down the development of digital technologies in the EU.
Short-term Measure: Digital Services Tax
3% temporary tax which covers digital activities currently not taxed in the EU levied on the gross revenue of large digital companies. In practice: In a similar way to VAT collection, the commission suggest a “One-stop shop” system for declaring and collecting the web tax at the EU level and double taxation issue would be solved by deduction from the Corporate Income Tax (CIT) base, whether or not taxes are paid in the same or different Member State(s).
This temporary tax could lead to collect EUR 5 billion annual revenue for the Member States. The new measure will affect large digital companies that have a revenue over 750 million /year and a digital revenue over than 50 million/year like : – Businesses based on the advertising model, including social networks and search engines (Facebook, Google, AdWords, Twitter, Instagram, free Spotify). – Businesses based on the agency model, including online marketplaces (Airbnb and Uber). – BUT Companies providing content and services in return for a fee based on a subscription model and e-retailers will generally not be caught.
However the proposed Short-term Measure presents some defaults: – A too broad definition of the definition of digital services that may lead to different interpretations and legal uncertainty. – A not enough broad target that permit digital retail store selling physical or digital products directly to consumers or businesses, such as Amazon and Alibaba, to not be under the scope of the tax. – A competitive disadvantage for small companies who use online platforms to buy and sell goods. – The risk to pass the tax burden to consumers as in it occur on past EU gross revenue tax such as air passenger duties. – Some technical difficulties when trying to identify the user location used as the base to levy the tax. – The risk that this measure to not be temporary.
Long-term Stand-Alone Measure: Digital Permanent Establishment and Profit Allocation Objective : reform tax rule that link taxation with the value creation’s location when businesses have significant interaction with via digital channels. This measure will link taxation with the significant tax presence/virtual permanent establishment. The Significant Digital Presence will be established if one or more condition is met : o More than EUR 7 million annual turnover in one Member State in a tax period; o More than 100,000 users in a Member State in a taxable year; o More than 3000 contracts for digital service supply in a taxable year.
The Directive also includes profit allocation rules related to intangibles. This proposal will be applicable to EU taxpayers as well as companies established in a non-EU jurisdiction if identified as having a significant digital presence un a EU Member state. The long-term approach will affect a broader range of digital services than the short term proposition; such as the provision of films, music, software and cloud computing. However, the Commission made a list of exemptions including radio and telecommunications, television broadcasting, delivered goods and professional services like lawyers and financial consultants.
Here again, this proposition presents some defaults : – It require double taxation treaties between the member states which is complicated to implement. – The risk that the tax would eliminate many business’ margins. – A doubt concerning the base to define PE : supply-side or demand-side. – A doubt concerning whether the virtual PE should co-exist with the physical PE. – A risk for the European rules to strongly differ from the rest of the world. – The fact that Member states will be affected differently : some export-oriented country could be affected more negatively than the others. – Possible retaliation from economic partners.
Finally these two propositions caused some divergences among the Member states. Countries that are supportive or accepting : 20 out the 28 including five biggest economies : France, Germany, Italy, Spain and the UK. These countries claim that digital companies get unfair benefits from their internet-based operations. Countries that are against : Ireland, Luxembourg, Malta, Cyprus, Hungary, the Netherlands and Belgium. In fact, the smaller EU states host businesses that will have to pay the digital tax and this tax will be deducted from the base of the local corporate income tax but they don’t have many local users.
Common Consolidated Corporate Tax Base Plans of the EU
Originally, the Commission proposed a first version of CCCTB in 2011 but it was too ambitious at this time. In 2016, the Commission decided to re-launched CCCTB proposal. What is CCCTB ? The European Commission define it as “a single set of rules to calculate companies’ taxable profits in the EU.” The commission wants to implement it through a two-step process. (1) Common Corporate Tax Base (2) Consolidation (1) In practice, each companies (parent and subsidiaries) that are part of the same multinational group residing in the EU compute their taxable profit separately using the same harmonizing tax rule.
On this base, the country apply its own corporate tax rate. (2) The profit of each group member is added and consolidated. Group income is divided and allocated to the member state in which the company is located and allocated profits are taxed according each country corporate tax rate. The system will be mandatory for large groups (that have consolidated revenue over 750 million/year) and will remain optional for the others.
The system give strong incentive to R&D activities through a deduction of these spending, it will also improve the single market, support growth, jobs and investment in the EU as well as fight tax avoidance. Concerning digitalization, the European Parliament voted in favour of the establishment of a virtual PE according quietly same rules as the long term proposition of the May 2018 directive.
Conclusion
We can denote that both the Council and the European Commission have on numerous occasions expressed their preference for a coordinated tax policy in response to the digitalization of the economy at the global level. However, they have also draw attention to the previous lack of consensus and the limited progress made at the OECD level (see the news) in implementing a global standard to justify unilateral action at the EU level. The other major concern is how the United States will react to these proposals, as the European Commission estimates that around 120 to 150 companies will fall within the scope of the new rules.