A new tax system for the digital economy in the European Union

At its meeting held on December 5, 2017, the Economic and Financial Affairs Council of the European Union (ECOFIN) approved its conclusions on taxation of the digital economy in the EU. These conclusions are part of the broader objective of the Digital Single Market Strategy for Europe, and are aimed at guiding the legislative proposals which, in relation to taxation at least, the European Commission will have to put forward by early 2018. In this same context new VAT rules on e-commerce were approved.

The Digital Single Market (DSM) Strategy for Europe is one of the top political priorities of the European Commission, and seeks to achieve the approval of a stable framework in matters such as data transmission and digital content, audiovisual services, digitalization of the public sector, the creation of a first rate infrastructure and communications network (5G) across the EU, setting a common approach to cybersecurity and the fight against online crime, investment in training, education and R&D fit for the digital age, artificial intelligence and blockchain technology, among others.

In the field of taxation, the documents published by the Commission and the Council start out from the widelyheld view that the traditional rules on distribution of taxing powers (based on tax residence or the existence of a permanent stablishment), the very definition of permanent establishment, or the context offered by doubletaxation treaties were only suitable in the so-called traditional economy, but are no longer fit for purpose in relation to the taxation of income in the digital economy.

In these context, it is sought to redefine those taxation rules to limit opportunities for base erosion, on the one hand, and on the other, to ensure that taxation is neutral (equivalent) regardless of the way of doing business of enterprises and their degree of digitalization. This makes it necessary to align effective taxation with value creation in accordance with the arm’s length principle, having regard to the value chain in the digital economy and the zero relevance for these purposes of having a greater or lesser physical connection with a specific jurisdiction. It may be seen, therefore, that this initiative is clearly related to BEPS Action 1 (Addressing the Tax Challenges of the Digital Economy), to the operating models it defines, and to the potential proposals for reform indicated in that report.