Global Tax Alert | 19 September 2017

ECOFIN discusses development of new digital taxation rules

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Executive summary

On 16 September 2017, the finance and economic affairs Ministers of the European Union (EU) Member States discussed the challenges of the existing tax rules in the digital world economy at their informal Economic and Financial Affairs Council (ECOFIN) meeting in Tallinn, Estonia. The spread of new business models and the increased internationalization of business activities has raised heightened concerns regarding taxation in this area.

At the Tallinn meeting, it was agreed that a two-phased approach would be further assessed for viability: an initial phase would focus on the potential short term adoption of an equalization levy (EL) while a solution focusing on the Estonian suggestion of the adoption of a digital permanent establishment (PE) concept would also be studied by the European Commission as a longer term model. In practice, swift agreement on the longer term model could remove the need for an EL.

The Ministers agreed to focus on the development of new digital tax rules and to try and reach a common understanding at the next ECOFIN meeting in December. While these developments are being driven by EU Member States (and thus the European Commission, in its coordinating role) and are therefore separate from the work of the Organisation for Economic Co-operation and Development (OECD), it should be assumed that some form of alignment between the two organizations will be a key objective in the coming months.

Detailed discussion

The importance of creating digital tax rules has recently received increasing attention in the global tax policy debate. The debate centers upon the perspective that the emergence and spread of new business models have made it harder to tax businesses possessing a digitalized value chain. According to the OECD, for example, the difficulties in adapting global tax rules to these rapid changes have been particularly apparent in the international tax arena.

It has been argued that the current international tax rules, which generally require physical presence in the jurisdiction for corporate taxing rights to arise, are unable to address the operating parameters of the existing and emerging digital economy, where digital goods or services may be delivered with minimal physical presence, even in the country of residence.

The run-up to the ECOFIN meeting

On 8 September 2017, the Finance Ministers of France, Germany, Italy and Spain sent a letter to the Estonian Presidency of the European Union, ahead of the informal meeting on 15-16 September, proposing an EL which would be levied on the turnover generated in Europe by digital companies.

Five days after the Finance Ministers’ letter, on 13 September 2017, a further development came in the form of a “State of the Union” letter from Jean-Claude Juncker, President of the European Commission, setting forth a series of initiatives (including existing proposals to publish key tax information on a country-by-country basis, establishing new transparency rules for tax planning intermediaries and a common EU list of non-cooperative tax jurisdictions) to be launched by the end of 2018. The letter also called for a Commission communication on the possibility of further enhancing the use of qualified majority voting and of the ordinary legislative procedure in internal market matters, on the basis of Article 48(7) of the Treaties of the European Union (i.e., the part of the Lisbon Treaty where such protocols are housed). Such a revision, if successfully negotiated, would potentially amend the EU’s voting system, removing the need for unanimity on tax issues, allowing Directives in this area to be passed via a qualified majority. This would represent a significant departure from existing protocols.

Notwithstanding the letters of both the Finance Ministers and Mr. Juncker, it was unclear in advance of the Tallinn meeting in which direction the debate would head.

Preceding weeks had seen other options proposed; such an approach could focus, said the French Minister for Economy and Finance, Bruno Le Maire, in early September, on the tax harmonization of national tax bases. The first stage of such a harmonization could occur between the tax bases of France and Germany, M. Le Maire explained, expecting that a common corporate tax base (CCTB) could be in place between these two countries by the end of 2018, in turn forming a platform for other countries to join.

The OECD, meanwhile, was reported by the media as working with France and Germany ahead of the Tallinn meeting to gain their support for a series of transitional methods in advance of a more global consensus being reached; such a transition approach might involve a specific tax or levy assessed on local turnover or sales (and therefore not covered by tax treaties) applied to companies having a consolidated turnover of more than €750M – i.e., the EL that was subsequently suggested by the four Finance Ministers.

ECOFIN meeting outcomes

Observations raised by participants during the meeting confirmed that they considered that the above-mentioned gap between business realities and current tax rules undermines the principle of tax neutrality.

Two approaches to fill the gap were discussed during the meeting.

A short term approach, according to which different kinds of taxes and levies would be applied in addition to the corporate income tax on profits, and where the taxation of digitally-derived revenues would be more connected with the source of income. Such an approach would center upon the potential short term adoption of an EL (as suggested by the four European Finance Ministers, and as present in India since enacted in its 2016 Finance Act). Despite their immediate effectiveness, short term, transitional rules may not be considered a reliable solution from a tax policy perspective, not least because of the many concerns for double or non-taxation.

The Presidency’s pre-meeting note argued that a challenging, but at the same time more robust way to approach the issue, would be a long-term approach based on the amendment and improvement of current international tax rules, which would in turn comprehensively be updated to address the existence of new, digitalized business models, but without creating effects and changes to tax law for already well-regulated situations.

An important shift from the existing rules would be the introduction of the new concept of a digital PE, along with the levying of taxes on virtual taxpayers, a significant departure from the well-known requirement of physical presence in a country as well as the OECD’s existing profit attribution rules. France and Germany had also submitted a pre-meeting suggestion that a CCTB between French and German tax bases may be one way to start addressing the perceived issue.

Media reports after the Tallinn meeting stated that 10 EU Member States signed a statement in support of an EL (i.e., the transitional short term approach outlined above) on 16 September. They are Austria, Bulgaria, France, Germany, Greece, Italy, Portugal, Romania, Slovenia and Spain. Belgium and the Netherlands publicly backed the initiative.

Notwithstanding the number of pre-meeting proposals and the overall lack of consensus illustrated by a number of EU Member States’ comments after the meeting, the Estonian Presidency issued a press release at the conclusion of the meeting that stated that “Ministers agreed to move forward swiftly and to reach a common understanding at the ECOFIN Council in December.” That ECOFIN meeting is scheduled for 5 December.

Next steps

Reflecting a widespread increase in interest in this area, EU Ministers were invited to share their opinions and preferred ways to target these challenges during the ECOFIN meeting in December. A European Commission communication in regard to potential next steps is expected in advance of the summit of EU leaders in Tallinn on 29 September (at which digital issues will be raised), with key messages to be agreed at the 5 December meeting of ECOFIN.

On that basis, legislative language in relation to an EL could potentially be made available as early as the first quarter of 2018.


Both the direction and timetable that the stakeholders may follow in regard to digital taxation represent a distinct change to the pre-existing path and tempo of the ongoing debate in this area. The Base Erosion and Profit Shifting (BEPS) Action Plan 1 report discussed (but ultimately did not recommend) three options to tax digital transactions, including an EL. It did say, though, that an EL may be implemented unilaterally, without disturbing the implementing country’s international treaty commitments.

The immediacy of events effectively increases pressure on the OECD, and could impact its proposed timeline; it is possible that both the spring 2018 interim report on BEPS Action 1 and the final report scheduled for delivery in 2020 will be significantly moved forward.

The possibility that various stakeholders propose a digital PE concept as a long term solution may increase the pressure for other Member States to join the group of 10 countries currently supporting the approach or else risk losing the opportunity to collect these new tax revenues.

Though seemingly intended to address taxation issues for certain large, internet enabled technology companies, the impact of this proposed EU policy change may impact a far broader group of companies engaged in digital transactions (based upon how they are defined). Companies undertaking digital transactions across borders should consider the impact of these proposed changes on their existing operating models and closely monitor developments in the coming months. Notably, many other jurisdictions are closely monitoring these developments and may consider similar legislative action.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, Global Technology Sector, San Jose
  • Channing Flynn
    +1 408 947 5435
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich
  • Klaus von Brocke
    +49 89 14331 12287
Ernst & Young LLP (United Kingdom), London
  • Mat Mealey
    +44 20 7951 0739
  • Chris Sanger
    +44 20 7951 0150
  • Rob Thomas
    +44 207 760 5538
Ernst & Young Belastingadviseurs LLP, Rotterdam
  • Ronald van den Brekel
    +31 88 407 9016
  • Marlies de Ruiter
    +31 88 407 7887
Ernst & Young Belastingadviseurs LLP, Amsterdam
  • Konstantina Tsilimigka
    +31 88 407 2165
Ernst & Young LLP, Global Tax Desk Network, New York
  • Jose Bustos
    +1 212 773 9584
  • David Corredor-Velásquez
    +1 212 773 6259

EYG no. 05322-171Gbl