International Taxation in the Digital Era: The Rapidly Evolving European Perspective

by Skadden, Arps, Slate, Meagher & Flom LLP
Contact

Skadden, Arps, Slate, Meagher & Flom LLP

Europe’s politicians worry that international tax rules have not kept pace with the digital economy and too easily allow multinationals to organize their global operations to minimize net taxable profits in high-tax European countries.

Pressure has been mounting throughout the European Union to crack down on what some perceive to be aggressive tax planning. The European Commission, France, Italy and the U.K. have now taken initial steps in this area.

New Taxation Efforts

The European Commission first took steps — using competition law rather than tax law — by suing individual countries for employing attractive tax regimes that allegedly violate European state aid rules. (See our September 2017 Insights article “EU State Aid Enforcement: What Multinationals Need to Know.”) It remains to be seen whether these novel challenges can survive review in the European Court of Justice.

These challenges also have been limited to relatively specific situations in which a particular taxpayer allegedly benefited from a deviation in the host country’s normal tax treatment. The same argument cannot easily be made against groups selling goods or services, particularly electronic ones, in one country, while maintaining a base physically in another country, such as Ireland, where they enjoy standard low corporate rates.

International and Regional Reforms

The view expressed by the Organisation for Economic Co-operation and Development (OECD) in its base erosion and profit shifting (BEPS) project — i.e., that profits are to be taxed where value is created and economic activity undertaken — is widely shared, but there is no general global agreement on what constitutes “value creation” in the context of digital business and how to apportion it.

There is no general global agreement on what constitutes “value creation” in the context of digital business and how to apportion it.  

Accordingly, Action 1 of BEPS on the digital economy highlighted that because reaching any consensus was not going to be easy, it would not make formal recommendations — although that admittedly was two years ago. Nor did the OECD’s multilateral treaty initiative, containing new permanent establishment definitions and anti-tax avoidance provisions to be introduced in approximately 3,000 tax treaties when it enters into force, revolutionize the way tech groups are taxed. In any event, the U.S. (a key jurisdiction for digital businesses) declined to sign the treaty, and now its newly enacted international tax reform seeks to subject to U.S. tax foreign source income derived from foreign low-tax intangibles assets as well as levy a new withholding tax on payments by U.S. groups to non-U.S. entities. Therefore, global consensus seems a long way off.

The European Commission is considering various short- and long-term responses to this lack of global consensus. It is reviving its common consolidated corporate tax base initiative, which aims to harmonize the corporate tax framework in Europe, in the hope that this will curb multinationals’ tax planning within the EU single market. Building support for such a framework has proven technically very complex given the history of different tax systems within the 28 member states of the EU. Furthermore, any such legislation would require the unanimous support of member states, and it is hard to see why Ireland or Luxembourg, which have created thousands of jobs for their residents by attracting tech giants with favorable tax policies, would agree.

The European Commission also is considering as a short-term solution other forms of Europe-wide taxation, such as revenue-based models or deemed permanent establishments, where the focus is collection either at the source from customers within the EU or through direct assessment on the turnover generated by non-EU groups from such customers.

Country-Specific Initiatives

Individual jurisdictions have looked to tackle these issues, but international taxation treaties have hampered them. The recent Google case before the Administrative Court of Paris illustrates this difficulty, with the French authorities failing to tax an Irish corporate resident selling services over the internet to the French. Although authorities throughout Europe have intensified information exchanges and multijurisdictional audits, they face having to comply with the high procedural bar set by the European Court of Justice in Berlioz to protect taxpayers in these matters using the EU Charter of Fundamental Rights. (See Johannes Frey, Alex Jupp and Frank-Michael Schwarz’s August 14, 2017, Tax Notes International article “The CJEU’s Berlioz Judgment: A New Milestone on Procedural Rights in EU Audits.”) So far, insufficient evidence appears to have been collected to launch many similar actions to Google.

The U.K. has adopted a 25 percent diverted profits tax that applies to “artificial” shifts of profits offshore by large multinational groups. France, followed by Germany, is threatening to adopt an “equalization tax” that would be imposed on the gross revenue generated in a particular state, rather than on net profits. The trend evidenced by these individual initiatives is concerning: Not only are they likely to be over-reaching as to the taxable base, but they could also result in double taxation in the absence of international coordination. Questions are almost certainly going to arise on their compatibility with new or existing treaties, European law and domestic constitutional principles.

Additionally, the U.K. has announced new withholding taxes for royalties linked to online sales in the U.K., where payments are earned by a low-tax jurisdiction, even where the payer of the royalties is not U.K.-based. Italy also has taken first steps toward an equalization tax that withholds on gross revenues. Again, treaties may impose limits here.

Conclusion

Certainly, one can see a dissonant world where the U.S. is increasing the tax on non-U.S. profit creation, the EU is forcing its member states to adopt one or several measures to tax revenues earned in its member states, and the U.K. is forging its own taxation and political path outside the EU. With no agreed-upon treaty resolution to resolve these tensions, avoiding double or even triple taxation on cross-border revenues is going to be a very difficult task in the short term. It may also spell the end for many zero-tax regimes in offshore jurisdictions. The next five years will for sure see a radical shake-up of cross-border tax planning for all multinationals with digital businesses. One can only hope that the rapidly assembled OECD Task Force on the Digital Economy can report some emerging consensus when it presents its interim conclusions to the G-20 in 2018.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Skadden, Arps, Slate, Meagher & Flom LLP | Attorney Advertising

Written by:

Skadden, Arps, Slate, Meagher & Flom LLP
Contact
more
less

Skadden, Arps, Slate, Meagher & Flom LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.