PRESS RELEASE: European Commission digital tax plan is a nail in the coffin for OECD tax rules

The Tax Justice Network welcomes the European Commission’s new measures to combat tax abuses in the digital economy – in particular, the intention to ensure taxes are paid in the places where business is done, and where profits are really made.

For the last decade, some of the worst offenders in the world of corporate tax dodging have been the digital giants, companies like Google, Facebook, Amazon and Apple. These companies present a particular problem for governments, in that so much of their business takes place online, making it easier for them to locate their profits offshore.

Today’s main announcement is the introduction of a ‘Digital Services Tax’. This short-term measure will apply a 3% tax on the revenues of companies related to specific online services, introducing the concept of a virtual ‘permanent establishment’ so that companies become taxable in jurisdictions where they have users – even if there is no employment or tangible assets.

An analysis of several major digital services companies operating in Europe for the Tax Justice Network reveals that such a tax would be roughly equivalent to an effective corporation tax rate of around 10%.

The European Commission estimates that digital services companies currently pay an effective tax rate of just 9%, whilst companies operating in the rest of the economy pay an effective rate of 23%.

However, there have been many well publicised cases demonstrating how some companies have used accounting tricks to get their tax rate down to close to zero. As such, the new measures will set a limit, preventing the most extreme abuse.

In addition, the Commission has announced a longer-term aim to align profits of digital companies much more fully with the location of their real economic activity. In keeping with the ongoing work to introduce a Common Consolidated Corporate Tax Base in the EU, such a measure would ensure that taxable profits were allocated in proportion to EU members’ share of activity.

This confirms the intention of the EU to break, comprehensively, with the OECD’s international tax rules – which require adherence to economically illogical transfer pricing rules, with profit divided between multinational groups’ subsidiaries on the basis of contrived, theoretical ‘arm’s length prices’.

Alex Cobham, chief executive of the Tax Justice Network, said:

“The European Commission’s digital tax directives are a welcome step. Not only do they put an immediate limit on the scale of these companies’ tax abuses, but they also set the course for the radical shift in international tax rules that we have campaigned for since our formal inception in 2003 – namely, the abandonment of the arm’s length principle and the switch towards unitary taxation of multinationals.”

Liz Nelson, a director of the Tax Justice Network, said:

“The EU is flexing its muscles, acting against OECD norms to protect its tax base, because it has the power to do so. But the whole world needs to make that shift, so that lower-income countries too can protect their tax base and support the progressive realisation of human rights to which the UN Sustainable Development Goals framework commits us all. Ultimately, this requires that tax policy be set in an international forum, breaking the rich countries’ hegemony, in order to allow all countries to act against multinationals’ tax abuse.”