Over the last few years, a lot of work has been carried out at international level to find a solution to the tax challenges arising from the digitalisation of the economy. According to the final report of the BEPS (Base Erosion and Profit Shifting) project, which was adopted in 2015, any ring-fencing of the digital economy was not possible because the entire economy is becoming digitalized. Therefore, the OECD/G20 Inclusive Framework on BEPS, established in 2016, has started to develop standards on BEPS-related issues. The OECD is mandated by the G20 to deliver a global, consensus-based solution to the tax challenges arising from the digitalization of the economy. Due to the Covid-19 pandemic, the deadline to find an agreement by the end of 2020 was postponed to mid-2021.
A two-pillar proposal by the OECD serves as a foundation for the current negotiations. It is based on the recognition that the digital economy cannot be ring-fenced. The first pillar deals with the reallocation of taxing rights over business income while the second pillar aims to establish a global effective minimum taxation of corporate profits. In October 2020, the OECD released blueprints for both pillars which contain numerous technical developments in the design of each pillar. Since then, technical work has progressed further and BDI has contributed constructively to the ongoing negotiations.
New approach by the US marks crucial phase of negotiations
When it comes to politics, 2021 has brought new momentum to the negotiations. Previously, the global talks have stalled as the US under President Donald Trump had called for an implementation of Pillar One on a “safe harbour” basis meaning that companies should be able to choose whether Pillar One of the project would apply to them or not.
However, in light of the administration change in Washington, the US has backed off from this plan. The commitment of the new Biden administration to re-engage in finding a compromise solution has significantly increased the chances of reaching an international agreement by mid-2021. The G20 Finance Ministers meeting beginning of April 2021 marks a potential turning point: On this occasion, the US submitted a new proposal for the reallocation of tax revenues which would drop the distinction between Automated Digital Services (ADS) and Consumer-Facing Businesses (CFB). Instead, this new proposal would be based on quantitative criteria such as level of revenue or profit margins and include no more than 100 of the largest and most profitable multinational businesses, “regardless of industry classification or business model.” Irrespective of the consequences of these recent developments, it is already clear that 2021 will be a decisive year for the reform of the international taxation system.
BDI supports the recent approach by the US to base the reallocation of tax revenues on quantitative criteria such as level of revenue and profit margins. The examination of qualitative criteria based on internet or consumer transactions would be associated with a high administrative burden.
EU should unconditionally support an international solution
In an initial reaction, the European Commission has announced a close examination of the US proposal. However, based on the notion that the latest US proposal would affect only “five or six digital companies”, the European Commission shortly afterwards clarified that it would continue to stick to its plans to bring forward a proposal for a European digital levy. In the view of BDI, the European Commission should anticipate the international developments and support an international agreement which is almost within reach and refrain from unilateral action. This applies even more as the European member states failed to reach unanimous consensus on the plan to introduce a European Digital Services Tax in the beginning of 2019. As a result, the European Commission had initially committed itself to the negotiations at international level in order to find a global, consensus-based solution and has been working in parallel to prepare the incorporation of an international agreement into EU law. Until summer 2020, the European Commission intended to pursue own initiatives only as an alternative measure in case the OECD should fail to agree on an international consensus.
The recent US proposals to limit the scope of Pillar 1 should not provide an impetus for the European Commission to press ahead with designing and presenting a European digital levy. Instead, it is important to back a comprehensive international agreement.
EU considers the digital levy as basis for additional own resources
In 2020, the intended reform of the own resources system marked a turning point in the European debate. As a result, the European Council stated in its conclusions of 17-21 July 2020 that the EU will work towards the introduction of a digital levy. This was reaffirmed in the statement of the European Council of 25 March 2021. The Council conclusions note that the European Commission is expected to table a proposal on a digital levy as a new own resource with a view to it being introduced by January 2023 at the latest. It is intended as a source to finance the repayment of the € 750 billion EU recovery fund. According to the European Commission, the preparatory work to come up with a proposal for a digital levy, in parallel to international discussions, follows the mandate given by the European Council in July 2020. The European Commission identifies several additional policy options, such as:
- A corporate income tax top-up to be applied to all companies conducting certain digital activities in the EU
- A tax on revenues created by certain digital activities conducted in the EU
- A tax on digital transactions conducted business-to-business in the EU.
The European Commission is expected to table a corresponding legislative proposal in the first semester of 2021 and has recently launched a public consultation which has ended in April 2021. BDI has responded to the public consultation. In an additional position paper, BDI has expressed its concern that discussion of unilateral measures at European level would run counter the aim of achieving a global level-playing field. German industry also highlights that unilateral action would lead to a further fragmentation of the international tax system and bears the danger of increasing international trade conflicts.
This is even more so because the US laid out in its recent proposal that they “cannot accept any result that is discriminatory towards U.S. firms.”
From BDI's point of view, a global solution is needed to address the tax challenges of the digitalization of the economy. This requires an international consensus, which is currently within reach. The European Commission should join such a consensus. For businesses it is key that the new global rules do not result in multiple taxation of business profits and that the administrative burden of implementation is limited.