Many international tax systems have become outdated because they were created before the explosive development of the digital economy. The current and internationally accepted understanding – that value creation, taxation and the taxpayer should all be present in the same jurisdiction is not taking us any further.
The digital economy allows companies to create value and for people to consume products and services irrespective of geographical location and physical assets. Taxation must take this into account and become more neutral, fair and transparent. Estonia as a digital country accepts this challenge and is rolling up its sleeves. Tax experts from the Estonian Ministry of Finance at the Estonian Permanent Representation to the European Union in Brussels examine the topics on the table during the Estonian Presidency.
Written by: Elo Madiste, Marko Talur and Kristo Madrus – tax experts from the Estonian Ministry of Finance at the Estonian Permanent Representation to the European Union in Brussels; and Dmitri Jegorov – Undersecretary for Tax and Customs Policy, the Estonian Ministry of Finance
The digital economy needs fair taxation
The international rules for taxing corporate profits begin with the presumption that physical assets are necessary for value creation, and that physical presence is required for earning taxable profits. However, business models using new digital solutions do not proceed from these presumptions.
As some examples; tourists no longer need to visit the office of a travel agency to find accommodation – all they need is a website they can trust. Mapping people’s shopping habits no longer requires an army of survey takers, as data can be obtained by analysing an individual’s credit card usage history. A music fan no longer needs a record store – they can get new music online.
These new business models are based on changes in consumption patterns and take advantage of the opportunities offered by digital solutions. These models were not created to avoid paying taxes, even though the profits of such companies are often not taxed due to the presently outdated international tax regulations. We find that the success and competitiveness of the digital economy cannot lie in the non-taxation of profits. The challenge for Estonia is to suggest new international tax rules that take into account the development of digital solutions and re-establish the equal taxation of corporate profits irrespective of how they were earned.
e-Commerce rules must become simpler and more transparent
Gaining an understanding of the different tax laws of EU member states is often too difficult for small companies and startups. Making the rules simpler would make trade between EU member states easier, and for companies with smaller local markets.
So, we’re working on an initiative that aims to provide companies with the opportunity to declare their turnover generated in another country, while paying VAT via the tax authority of their country of registration. This would make the reporting associated with cross-border trade considerably easier, especially for startups. Sellers whose turnover is less than 10 000 euros could calculate their VAT on the basis of just one country’s regulations.
The draft also wants to do away with the advantage that non-EU e-commerce companies have over EU companies. For example, it is currently possible to order goods for less than €22 from China without having to pay VAT, but VAT must be paid on goods of the same value bought in an EU online store. The draft also abolishes the VAT exemption for goods received from outside the EU.
We need an overview of third countries that do not cooperate enough in taxation
Countries outside the European Union should comply with good tax administration practices. We invite them to do so – exchange information about taxation, consider the principles of fair taxation and apply regulations to prevent the artificial relocation of profits to countries with more favourable tax schemes.
In order to achieve this, the member states of the European Union have initiated a process that includes reviewing the tax regulations of countries with significant economic ties to member states, and assessing their compliance with international standards. The process of assessment should, by the end of 2017, result in the preparation of a list of countries that do not exchange information, or allow for the establishment of offshore companies without any economic substance, or fail to comply with the international regulations for the prevention of relocation of profits.
Contacts will be established with all of the assessed countries, and dialogues will be held with them to urge them to cooperate. Countries that are not cooperative are included on a list and member states can apply measures to these, which mainly entail stricter requirements for transactions with persons of these countries.
Tax avoidance schemes must be disclosed to the tax authority
Tax optimisation and tax avoidance pose big problems for the European Union’s internal market.
Taxpayers and tax consultants who must consider the tax laws of several counties in their everyday work have gained a wide knowledge of the loopholes and inconsistencies of tax systems. This advantage over local taxpayers and tax authorities is constantly used for the development of new and increasingly complicated cross-border schemes, which make it possible to optimise taxes or avoid paying them altogether. We find that the success of multinational companies cannot depend on the non-payment of taxes.
We are discussing a new initiative that would require tax advisers (and in certain cases, taxpayers themselves) to give authorities information about the cross-border arrangements that are recommended and used for tax planning. Tax authorities would begin exchanging this information after the new rules enter into force in order to make it possible to react to new schemes as early as possible with tax audits or legislative amendments.
Countries and their tax systems are increasingly open to competition and the external world. The above initiatives are only some of the ones we discuss during the Estonian Presidency. Our progress in these topics depends on the cooperation of many other parties, including other member states. In any case, we will do our best to make a significant mark in the modernisation of the European Union’s tax system.