Consultation on the envisaged “digital levy”

Position

on the European Commission’s

Consultation on the envisaged “digital levy”

Federation of German Industries e.V. EU Transparency Register: 17718117758-48

Date: 9 April 2021

Consultation on a digital levy

Contents 1.

Introduction ........................................................................... 3

2.

General comments on the Public Consultation Document ....................................................... 5

2.1.

Specific remarks on the context and the general background information on the digital economy (Part 2) . 6

2.1.1. Double taxation risks need to be avoided .......................... 8 2.1.2. Risk of further fragmentation of tax systems..................... 9 2.2.

Current international taxation framework (Part 4) ............. 9

2.3.

Possible solutions to perceived problems in the taxation of the digital economy (Part 5) .......................................... 10

3.

Additional comments on the three envisaged policy options described in the Inception Impact Assessment . 10

3.1.

A corporate income tax top-up to be applied to all companies conducting certain digital activities in the EU .............................................................................. 10

3.2.

A tax on revenues created by certain digital activities conducted in the EU ........................................................... 11

3.3.

A tax on digital transactions conducted business-tobusiness in the EU .............................................................. 11

4.

Final remarks ...................................................................... 12

About BDI....................................................................................... 13 Imprint ............................................................................................ 13

Consultation on a digital levy

1. Introduction BDI, as the voice of German industries, appreciates the opportunity to respond to the European Commission’s consultation on a digital levy. Based on the European Council Conclusions of 21 July 2020, the political agreement between the European Parliament and the Council on 10 December 2020, and its reaffirmation by the members of the European Council on 25 March 2021; as well as in light of a need to support the EU’s borrowing and repayment capacity, the European Commission is tasked and committed to put forward a proposal on a digital levy by June this year. This digital levy is considered as a basis for a new own resource among others intended to be introduced by 1 January 2023 at the latest. We also understand that the European Commission is aware of the on-going negotiations for global corporate tax rules regarding the tax challenges of the digitalisation of the economy at the OECD/G20 level and is beyond that envisaging the proposal for a digital levy as an initiative separate from the negotiations within the OECD/G20 Inclusive Framework. As explicated by the European Commission at the ECOFIN meeting of 16 March 2021, the on-going work on a legislative proposal for a digital levy will be designed as an additional own resource for the EU. First and foremost, and based on the vague information available, we do not see how this will be consistent with and not undermining an international agreement at OECD/G20 level. Secondly, and more importantly, we want to stress that an international, consensus-based solution based on a comprehensive and globally coordinated approach between all jurisdictions is essential in responding to the tax challenges of the digitalization of the economy.

We want to recall that the digital transformation of the economy does not only affect digital corporations, but the entire economy. It is regrettable that the European Commission is bringing forward this initiative at a time where a fresh and realistic perspective exists for closing the discussions on digital taxes at the OECD/G20 level.

BDI fully supports the OECD process of establishing internationally coordinated standards for a legally secure taxation of business profits as a comprehensive and globally coordinated approach as this is the only way to obviate discriminatory unilateral action. We recognize the significant progress made to deliver on the mandate of the OECD/G20 Inclusive Framework and the commitment to address the remaining issues with a view to reaching a global and consensus-based solution by mid-2021. We hope to see an international agreement by the OECD-deadline.

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At a time which marks a decisive moment in the international negotiations, taking rash action by discussing a proposal and an introduction of a EU digital levy could be counterproductive in that sense as it would lead to a further fragmentation of the international tax system. Especially against the ongoing discussions at the OECD/G20, the discussion of unilateral measures at European level could be seen as contradictory, disturbing the aim of achieving a global level-playing field and worsening Europe’s relations with its international trading partners.

As we learn from the European Commission, there is a supposed need to “construct some other form of taxation that would affect the digital sector for other reasons than the ones which are under discussion at the OECD for funding (…) (the EU) budget.” Firstly, we do not share this assumption and secondly, we are extremely worried about the potential negative consequences from unilateral moves aimed at taxing the digital economy as they would run contrary to the enormous achievements of the BEPS project.

National solutions – such as digital taxes in individual states – or solutions introduced unilaterally by political blocs such as the EU only entail legal uncertainty, protract international taxation or even trade conflicts. As a result, they have a negative impact on growth and employment. Yet, it is precisely in times of crises that sustainable growth and employment must be promoted. Beyond that, we do not see how the European Commission wants to stick to the objective laid down in the Inception Impact Assessment, according to which the “initiative should be designed in a way that is compatible with the international agreement to be reached in the OECD as well as broader international obligations.” We cannot see how these political ambitions of the European Commission can be reconciled with the intention set out in the Inception Impact Assessment “not to undermine the on-going discussions at the OECD, nor to fuel international trade tensions.”

Instead of taking uncoordinated and discriminatory unilateral action, which will go along with additional administrative burden for taxpayers, and more importantly, will mainly increase double taxation risks for taxpayers it would be important to pursue all efforts to reach an international agreement.

Such a multilateral agreement should provide a basis for a steady, solid and long-term framework for an international, administrable and consensusbased tax architecture. Due to the challenges of constant technological change and evolving business models such an agreement must also necessarily include elements of tax certainty and mandatory binding dispute prevention and resolution mechanisms which is crucial in order to provide lasting legal certainty. The priority of European tax policy should be not only to fully support the efforts undertaken at OECD/G20 level, but also to provide

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Consultation on a digital levy

a sustainable basis for growth-friendly tax structures aiming at strengthening the international competitiveness of European businesses.

In that regard, the whole undertaking of proposing and introducing a digital levy at EU level would be counterproductive as it would add only another layer of almost unmanageable compliance efforts at European level. The effectiveness of unilateral measures strongly depends on the market power of the business concerned. Businesses with market power can pass on the additional costs to customers while those facing intense competition are unable to do so. For example, with regard to national digital services taxes already introduced by Austria, France, Spain, Turkey or the UK, multinationals as Amazon or Google have already announced to pass on the costs to its customers. Google has simply added new surcharges to the respective Google Ads costs. Regarding these “country-specific surcharges”, Google for example states that these “country-specific surcharges” are “associated with the cost of doing business in these countries.”1 2. General comments on the Public Consultation Document First of all, it is important that the European Commission recalls and stands to its commitment that a global consensus-based solution that addresses the tax challenges of the digitalisation of the economy should be factored into the final design and scope of an initiative transposing an international solution into European law. This should be designed in a way that is compatible with the international agreement to be reached at the OECD level as well as broader international obligations.

We are aware that several European countries have already decided to implement unilateral digital services taxes and that almost half of all European countries have either announced, published proposals or implemented a digital services tax – all of them varying significantly in their structure. BDI continues to advocate for a withdrawal of relevant unilateral measures in place at the time of agreement at OECD/G20 level. In the unwanted scenario of failed negotiations at OECD level, however, we recognize the political need for further coordination at EU level in order to avoid an additional fragmentation of tax systems within the EU. In this case, potential benefits and unquestionable risks must be considered carefully.

However, as already mentioned, we understand that EU digital levy could be introduced on top of an agreement to be reached at OECD/G20 level in order to serve as a repayment capacity for the “Next Generation EU” recovery plan or, according to President von der Leyen’s State of the Union Address, in 1

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Consultation on a digital levy

case “an agreement fall(s) short of a fair tax system that provides long-term sustainable revenues.” In case a global consensus can be reached by mid2021 among the 139 states collaborating through the Inclusive Framework, we find it hard to see how such an agreement could, from the European Commission’s point of view, fail to meet the objective of a globally fair, sustainable and modern tax system.

Regarding a potential co-existence of the digital levy with an overarching solution based on an international consensus we claim that any unilateral measures in place at the time of agreement at OECD/G20 level are abolished as this otherwise would significantly increase the administrative and financial burden for businesses. Even today and in light of the simplifications discussed under Pillar One, the respective provisions would be far from being easily administrable for businesses as they are based on the ambition to artificially connect the simplified Amount A with the arms’ length principle (ALP). Introducing a European digital levy ‘on top’ of an OECD agreement would not only cause severe double taxation risks, it would also come along with negative effects for the competitiveness of European businesses.

We also hear from the European Commission that the timeline of an OECD agreement in the basis scenario would not match the calendar for the introduction of additional new own resources. However, German industry is concerned that in this case, the digital levy would not only come along with additional administrative burden for European businesses, but would also be very harmful for the objective of bringing the on-going negotiations at OEDC/G20 level to a successful conclusion. Such a move could also cause new trade tensions and accelerate existing disputes with European trading partners and third countries.

In addition, BDI wants to provide some specific remarks on the Public Consultation Document and to respond to the individual questions raised in the consultation in further detail as follows.

2.1.

Specific remarks on the context and the general background information on the digital economy (Part 2)

German industry agrees that fair taxation of digital business models can support the aim of a level playing field which is key for equal chances of all industries in globalized markets. As mentioned above, BDI therefore fully supports the ongoing work at OECD/G20 level with the objective to design global corporate tax rules to address the tax challenges of the digitalisation of the economy.

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Consultation on a digital levy

However, BDI accepts the Consultation’s background analysis only to a certain extent. The foundations of the current negotiations are rooted in the BEPS Action 1 report. With regard to the digital levy envisaged by the European Commission, we want to recall that the objective of BEPS Action 1 was to examine the existing tax system for taxation challenges to the digital economy and that the analysis ultimately concluded that there is no digital economy as such: A distinction between the digital economy and the “conventional” economy is not possible and does not yield the desired results.

Digitalization is increasingly affecting the entire economy and transforming previous analog business models into digital models. The OECD therefore concluded that the existing world tax code, which is strongly oriented towards brick-and-mortar business, does not need stand-alone measures to address the digital economy. It instead requires a new taxation approach adapted to digital business models which is currently developed and finalized in the on-going negotiations at OECD/G20 level. These discussions clearly demonstrate that defining the scope of a measure that is targeted to address the challenges of the digitalisation of the economy is more than a difficult undertaking. Therefore, establishing rules explicitly designed to tax the digital economy would not only cause additional complexity. It is indeed a nearly impossible endeavour that would only lead to new distortions as conventional business models are more and more turning into digital business models across all industries.

Additionally, it has to be recalled that in case the European Commission envisages – contrary to the objective of the OECD/G20 negotiations to ensure a level playing field among all jurisdictions – the introduction of a digital levy on top of a global agreement – which we strongly advise against –, this could lead to the liability of registration for digital tax purposes in all EU member states. In this case, means for procedural simplification (e.g. analogous to the EU VAT Mini One-Stop-Shop (MOSS) scheme) would be a prerequisite.

Besides, one has to remember that traditional businesses basically use the same distribution structures for their digital business models. As a result, sales to the local end customer are regularly taxed by the local distribution organization. This is why such businesses should be out of scope. However, we find it rather difficult to provide substantial feedback on the envisaged scope of the announced proposal for a digital levy, as a clear and consistent intention behind this instrument substantiated with a profound analysis is still missing.

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2.1.1. Double taxation risks need to be avoided German industry, which is right in the middle of the process of digitally transforming their business models, is worried that double taxation arising from a European digital levy would come along with damaging effects.

From our point of view, the additional policy options mentioned and identified by the European Commission would only lead to an introduction of an additional tax into the already complex international tax environment causing high uncertainty for all stakeholders. In effect, the introduction of a digital levy at European level, which under the current ideas could have a character similar to an income tax, would increase the risk of excessive taxation. For example, digital revenues (e.g. from the sale of data) of traditional German companies are already regularly taxed in Germany at around 30%. In this context, however, it has to be taken into account that there is a tax rate differential between GAFA companies and European-based businesses which already face a one-sided tax burden which puts them at a strategic disadvantage in terms of innovation vis-a-vis American or Chinese competitors.

The high tax burden on German businesses is already today a competitive disadvantage as tax payments minimize liquid assets as a capacity needed when making investment decisions.

Representatives from the European Commission also highlight that it would be “rather unlikely” to “target SMEs and startups” with this digital levy. They mention that “in between the SMEs and the digital giants that are targeted by the OECD, there are actually a huge number of companies in Europe” which could fall under the scope of this instrument. If the digital levy is not to target GAFA companies, but European-based medium-sized businesses, this would only add an additional layer of tax burden to German businesses. Instead of such plans, an ecosystem is needed which supports the digital transformation of both industry and every-day life in order to harness the full potential of digitalisation. We therefore need a holistic strategy creating a favourable environment for a successful digitalisation of European businesses of all size.

Further possible double taxation risks would have to be countered by several measures such as the introduction of an intercompany exemption to avoid that the same revenue is taxed both at the level of HQ-EU distribution organization and the level of EU distribution organization-consumer.

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2.1.2. Risk of further fragmentation of tax systems The European Commission rightfully states that in the absence of a global agreement, some EU Member States have introduced certain temporary tax measures affecting businesses that are part of the digital economy. It is important that any unilateral measures in place at the time of agreement at OECD/G20 level are abolished. In light – and even in absence – of an agreement to be reached at OECD/G20 level, we explicitly warn from introducing unilateral measures in addition. In a time where industry is challenged by a dynamic and rapid transformation and evolvement of business models, additional taxation would damage the competitiveness of Germany and Europe as a business location.

Already toady, businesses are confronted with numerous national regimes in the area of digital taxation (among others, but not only in France, Spain or Italy). The different scope of these regimes is a major challenge for businesses which usually have to manually identify the respective digital products per country. The introduction of a European digital levy must therefore be aligned with the ongoing work at OECD/G20 level. It has to be exclusively intended to transpose an international agreement into EU law.

2.2.

Current international taxation framework (Part 4)

Question 23 and 24 relate to the “most important taxation challenges that digitalisation brings for national tax systems.” Apart from the fact that we are concerned by the implicit supposition behind some of the challenges mentioned, we would like to point out that national tax systems are confronted with several other challenges resulting from digitalisation. For example, it would be helpful to expand digital communication channels – in both directions – between tax administrations and taxpayers.

Regarding question 27 as to which measures taken by EU countries at national level to tax the digital economy we consider as most effective, BDI wants to explicitly reiterate that the tax challenges of the digitalisation of the economy can only be solved by a comprehensive and globally coordinated approach. Unilateral action, such as already introduced in some member states or discussed on EU level, should be avoided since unilateral measures lead to a fragmentation of the international taxation system which further exacerbates differences in tax burdens and tax arbitrage.

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2.3.

Possible solutions to perceived problems in the taxation of the digital economy (Part 5)

Question 30 relates to the complementarity of the objectives of the digital levy to the objectives of the international negotiations on Pillar One which focus on the reallocation of profits by expanding the taxing rights of market jurisdictions to compensate the digital activities performed remotely and directed at those market jurisdictions. We do not see to what extent these two objectives could be complementary to each other and want to reiterate our position that any unilateral measures in place at the time of agreement at OECD/G20 level should be abolished as this otherwise would significantly increase the administrative and financial burden for businesses.

3. Additional comments on the three envisaged policy options described in the Inception Impact Assessment In its Inception Impact Assessment, the European Commission states that “the new initiative will help address the issue of fair taxation related to the digitalisation of the economy and, at the same time, is intended to not interfere with the ongoing work at the G20 and OECD level on a reform of the international corporate tax framework.” Apart from the baseline scenario, the European Commission raises three different policy options, including (a) a corporate income tax top-up on all companies with digital activities in the EU, (b) a tax on revenues from certain digital activities in the EU and (c) a tax on digital B2B transactions in the EU without further specifying these options. The most relevant issue missed by these policy options is that the digital economy cannot be ring-fenced as the whole economy is becoming digitalized and business models undergo constant changes. We understand from the European Commission that no decision on the design of a digital levy has been taken, hence, we want to respond to question 31 in more detail below.

3.1.

A corporate income tax top-up to be applied to all companies conducting certain digital activities in the EU

In its public consultation document, the European Commission states that the initiative to introduce a digital levy will be designed in a way that is consistent with the Digital Services Act package which i. a. aims “at promoting fairer and more open digital markets for everyone.” We understand that in its recent proposal for the Digital Services Act, the European Commission lays down measures to promote fairer and more open digital markets. In general, we welcome the overall policy objective to foster innovation, growth and www.bdi.eu

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competitiveness within the single market. However, we do not see the connection between the policy objectives of the proposal for the Digital Services Act and the envisaged digital levy, as the latter would be incompatible with the goal of strengthening the European digital market and European digital sovereignty. Proposing a top-up corporate income tax specifically related to digital companies would run counter to the objective of a Single Digital Market to compete with international competitors such as the USA or China.

3.2.

A tax on revenues created by certain digital activities conducted in the EU

First and foremost, we want to recall that taxing corporate revenue, rather than income, is inconsistent with international tax principles. If the digital levy were to be levied as a tax on gross profits, it could result in the tax being passed on to the customer instead of the intended additional / top-up taxation of businesses. Such an approach, or the possibilities for it, is precisely the one presented by GAFA companies in the consultation on the “Equalization Levy” as part of the BEPS project. It can therefore be expected that the additional tax would not ultimately affect digital corporations. Therefore, such an approach must be strongly rejected.

3.3.

A tax on digital transactions conducted business-to-business in the EU

In the case of transactions between companies, cascading effects can occur if a digital levy has already been imposed on the preceding provider. Such a possibility was not explicitly included in the former European Commission proposal. The current design of unilateral initiatives, e.g. by Austria, also raises doubts about this. Although the Austrian implementation allows for the consideration of inputs if they were subject to digital tax, it is at least doubtful whether this also covers intra-Community inputs. If intermediate inputs were not taken into account, this would result in a double tax burden. If such inputs can be taken into account, the question arises as to the type of tax; a characteristic feature of VAT is, for instance, the deduction of taxes on inputs. However, Art. 401 of the VAT Directive prohibits the introduction of a tax comparable to the VAT, although the current design of a digital levy comparable to the VAT is disputed in the literature. The qualification can be avoided by a corresponding design of the regulation, but such an undertaking still involves considerable legal uncertainties for the companies concerned.

The characterization of the tax as a direct or indirect tax may sound trivial at first but is of particular importance for German companies in the case of an EU-wide application. In the case of categorization as an indirect tax, the www.bdi.eu

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question arises as to the legitimacy and necessity of harmonization at EU level. Furthermore, it is inherent in indirect taxes that they do not burden companies, but ultimately the consumer. This would be in direct contradiction to the objectives of the digital levy. In the case of direct taxes, the question of interaction with other income taxes arises. Since the goal of the digital levy is to tax untaxed profits in the market states, an additional burden on companies that are already subject to income taxes must be avoided. The EU proposal for a directive on the DST provided for a credit against corporate income tax, which poses the question of admissibility for German companies in particular, since Section 12 No. 3 of the German Income Tax Act (EStG) prohibits the deduction of income taxes from the tax base for individuals and partnerships, and Section 10 No. 2 of the German Corporate Income Tax Act (KStG) prohibits the deduction of income taxes from the tax base. Depending on the design of the provision, the German tax credit regulations may have to be adapted. Although a legally compliant design would certainly be possible, this would probably be in direct contrast to other EU member states and would lead to a fragmentation of uniform regulations and probably violate the principle of harmonization in the field of taxation. Furthermore, there is the further challenge of applying double taxation treaties and transfer pricing principles.

4. Final remarks We want to reiterate that the tax challenges arising from the digitalization of the economy can best be addressed through a consensus-based, worldwide solution and explicitly warn from unilateral directive proposals which do not take into account the developments and achievements to be reached at OECD/G20 level. The European Commission should therefore refrain from pushing forward own initiatives in this field and instead continuously support the ongoing and multilateral work at OECD/G20 level.

BDI’s most recent response to the public consultation on the OECD/G20 Inclusive Framework’s Pillar One Blueprint and Pillar Two Blueprint can be found here, BDI’s overall priorities for European tax policy are summarized in a separate position paper.

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About BDI The Federation of German Industries (BDI) communicates German industries’ interests to the political authorities concerned. She offers strong support for companies in global competition. The BDI has access to a wide-spread network both within Germany and Europe, to all the important markets and to international organizations. The BDI accompanies the capturing of international markets politically. Also, she offers information and politico-economic guidance on all issues relevant to industries. The BDI is the leading organization of German industries and related service providers. She represents 40 inter-trade organizations and more than 100.000 companies with their approximately 8 million employees. Membership is optional. 15 federal representations are advocating industries’ interests on a regional level.

Imprint Federation of German Industries e.V. (BDI) Breite Straße 29, 10178 Berlin, Germany www.bdi.eu T: +49 30 2028-0 Contact Dr Monika Wünnemann Head of Department Tax and Financial Policy T: +49 30 2028-1507 M.Wuennemann@bdi.eu Philipp Gmoser Senior Manager Tax and Financial Policy T: +32 2 79210-12 P.Gmoser@bdi.eu BDI document number: D 1363

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