Commissioner Moscovici has given a speech at the European Internet Forum 'Masters of Digital' 2018 event.
Digital companies are growing faster than the economy as a whole. Corporate tax frameworks in particular have not been able to keep up. They were conceived in a pre-internet age and are confounded by today's mobile, globalised and digital companies. They rely heavily on the concept of physical presence and are underpinned by the simple principle that profits should be taxed where value is created.
In Europe it has become common enough for companies to have a significant digital presence in a Member State, and make substantial profits there, but to enjoy tax levels close to zero. One social media company generates today well above half of its revenues from its international business. It offers services to consumers abroad and uses their data to further improve its services. It concludes contracts in foreign jurisdictions, taking full advantage of the infrastructure and rule of law institutions available there. Yet only 5% of the taxes paid by this company accrue to these jurisdictions. What is visible here is a deep schism between where digital profits are generated and where they are taxed (if at all). That calls for a fundamental overhaul of our corporate tax systems – and Europe is about to decide how to do just that.
A European proposal will address the problems of:
Where to tax: by finding a fair and balanced way to establish taxing rights, taking into account that a business may provide digital services to users in a market without being physically present.
What to tax: by establishing a fair and effective way to reflect new forms of value creation, such as the user contribution, in the allocation of profits.
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