A new Organisation for Economic Co-operation and Development (OECD) report suggests that the European Commission’s plan to introduce new taxes on digital companies could cause significant economic disruption.
The report shows that there are still strong disagreements between the OECD’s 35 member countries over how new taxes on digital companies should be implemented, and warns that the introduction of new rules by the EU this week could create economic distortion.
Prospective new taxes on digital companies were first announced by European Commissioner for Economic and Financial Affairs, Pierre Moscovici, last month, and were welcomed by many EU countries – notably Germany and France.
However, there were also objections from countries with lower corporate tax rates, such as Luxembourg and Ireland. Some member states have accused big digital companies of avoiding tax by routing their products through these low-tax member states.
What does the new tax include?
A draft proposal suggested that large digital companies with revenues of more than €750m per year, and including €50m of taxable income earned in the EU, would now be subject to a 3% turnover tax. The €50m threshold was raised following a prior draft, to ensure that the tax would not unfairly impede start-ups and SMEs from starting or expanding into Europe.
However, the OECD report warns that because the EU’s efforts are uncoordinated with those of other countries, this could lead to problems. Instead, the paper recommends reaching a global consensus on how to tax digital companies before introducing or reforming legislation.
The report reads: “Solutions are currently being explored by the EU Commission, which is expected to deliver proposed legislation in the course of 2018. While these initiatives are generally taken to increase the level of taxation of digitalised businesses, they are also likely to generate some economic distortions, double taxation, increased uncertainty and complexity, and associated compliance costs for businesses operating cross-border.”
The OECD also warns that the EU’s upcoming measures have created a sense of urgency among other member countries to introduce their own tax legislation, which could in turn exacerbate the lack of co-ordination between international tax laws governing digital companies.