EU tax on digital businesses - or business per se?

September 18, 2017

PwC partner Alenka Turnsek considers what the digital economy means for businesses and their tax strategy

Reading reports about the EU developing a new tax on companies in the digital economy it'd be easy to assume only large tech businesses will be affected, which is the current focus of the EU initiative.  In reality, any such plans could impact most businesses (albeit not immediately) regardless of whether or not the businesses operate in the tech sector and how much tax they pay.  

Tax and the digital world is a huge conundrum for policy makers.  For how do you define a digital business when most businesses have a digital component?  And how do you tax digital activity when the tax system is based on more tangible concepts like sales, assets, and the value people create?   

Brussels is not the only place where people are looking at the digital tax puzzle.  It was a big component of the OECD's recent review of the global tax system, and the OECD is set to update this component soon (unsurprisingly it was deemed too complex to tackle in one go).  The EU and OECD could join their efforts - otherwise the idea of the two working in parallel makes little sense when this is ultimately about bringing a more consistent and certain approach to global tax.  But it’s equally possible the EU could go it alone, which could have all manner of ramifications, particularly on those territories that nurture digital rich businesses.  

One of the latest tax ideas, pushed originally by France, includes a tax on revenues (equalisation levy) of digital firms.   But given most businesses have a level of digitisation,  how do you work out which businesses it should apply to?  Does it become a blanket tax on business, or do you have different rates for different types or sizes of business, and if so how do you begin to categorize them?

Other alternatives have been put on the table, in addition to the equalisation levy and withholding tax,  and include defining a digital 'permanent establishment' and EU Common Consolidated Corporate Tax Base.  Assessing whether a business has sufficient activity in a particular country to create a taxable presence - a ‘permanent establishment' - is a key principle of the global tax rules.  Creating a digital version makes sense in theory, but where do you start in the absence of an office or people - is it where a server sits or where data is collected, processed, or held?

Getting to a solution might be an enormous challenge, but don't assume it will be kicked into the long grass.  Momentum is building, so perhaps the only certainty is that there will be more uncertainty.