EU and OECD officials will impose a digital services tax to tax the digital economy. We explore the proposed and current developments in taxing digital services globally and what implications it will have on the wealth of HNWIs globally as well as businesses who offer digital services.
OECD’s Inclusive Framework and proposed 2 Pillar Tax
The OECD’s Inclusive Framework on BEPS announced its plan on the tax challenges of digitalization and reiterated that it will continue to work on it in the coming year. The Inclusive Framework envisions a dual pillar system of taxation. It is argued that the digital economy means corporates can obtain income from users (online) in a target market without needing to have a presence there for tax purposes or pay tax there.
Pillar One of the Inclusive Framework sees a new taxing right involving the reallocation of some of a multinational’s profits to the countries it delivers services to, widening the taxing powers of those countries vis a vis the taxing power from the country where the company is producing goods or where it is registered. This in itself could undermine traditional international tax planning structures to some degree.
Pillar two sets out a global minimum tax for major multinationals who produce more than EUR 750 Million. The pillars are detailed in hundreds of pages long proposals and are currently being reviewed by 137 OECD Member states, but in brief, it could mean that ‘large’ multinationals would soon be subject to a set global income tax that could be over 12.5%.
If businesses wish to provide comment they may do so from mid-October until mid-December 2020. A public consultation will take place in January 2021.
Read more: Investment Migration and Corporate Excellence in Malta
European Union’s Digital Services Tax
If that weren’t daunting enough, companies registered in the EU/doing business in Europe face another major challenge as EU officials have stated that if no agreement is come to on the OECD Inclusive Framework, the EU will proceed with its own legal framework that will mirror the OECD’s proposed two-pillar tax.
Executive Vice President of the European Commission (EC), Valdis Dombrovskis reiterated Europe’s position to impose a tax on digital services at a continental level as opposed to at a state level.
“We stand ready to come forward with a digital taxation proposal at the EU level, because we would like to avoid the fragmentation of the single market if different member states now start introducing different digital taxes,”
Valdis Dombrovskis, European Commission Exec. VP
Adding to this sentiment, in a recent address Ms von der Leyen confirmed that should no agreement be found at the OECD or G20 level to tackle fair taxation in this digital age we all operate, then the European Commission would have a proposal ready by early 2021 on this matter As coffers run dry due to the pandemic and economic crisis, the EC is seeking ways to regulate the sale of digital services and bolster tax revenues as we enter ‘Europe’s Digital Decade’.
“We need a common plan for digital Europe with clearly defined goals for 2030, such as connectivity, skills and digital public services. And we need to follow clear principles: the right to privacy and connectivity, freedom of speech, free flow of data and cybersecurity”.
Source: KPMG, “Taxation of the digitalized economy: Developments summary,” October 6, 2020, https://tax.kpmg.us/content/dam/tax/en/pdfs/2020/digitalized-economy-taxation-developments-summary.pdf.
Will the digital services tax hinder or promote business in Europe?
Has the world gone ‘online’ as we all stayed indoors? Yes.
It would seem that the lock downs, quarantines and public health concerns have resulted in us spending more time online. In fact, according to Hootsuite and We are Social’s latest report on Global Digital Growth, Social Media users have increased by 12.3% in the last 12 months – that is exponential considering population grew at a rate of just 1%. Global data consumption also grew exponentially, spending online increased as did screen time.
Do we need any more proof of this digitization than the fact that the world’s leading technocrats, Zuckerberg, and Bezos to name but a few, have had exponential surges in their wealth as the rest of the world suffers a severe recession. Just this year Facebook’s Zuckerberg became a centi-billionaire and Bezos’ net worth grew by over 75 Billion USD.
How does the OECD and EC respond to these digital entrepreneur’s success? By taxing them.
In efforts to be fair and equitable, governments around the world both at national and regional levels are keen to push ahead with the taxation of digital services, of our increasingly digital economy.
Will this hinder business in the digital world?
Are tax incentives not meant to bolster entrepreneurship and tax burdens be used to deter people from detrimental products like alcohol and tobacco?
How will the proposed digital taxes impact the wealth of High-Net-Worth Individuals (HNWIs) across the world?
What impact will a global tax / EU wide tax have on companies that have set up their headquarters in Luxembourg, Cyprus, Malta or Ireland?
