The European Commission has fired a shot across the bows of some of the world's largest online companies over the issues of tax avoidance.
Using mismatches in the tax regimes of European member states, companies including Google and Amazon are able to sell billions of euros of physical and digital goods in individual countries but pay only a small percentage back in tax to the state.
The European Commission's High Level Expert Group on Taxation of the Digital Economy yesterday published a report that paves the way for an end to tax avoidance in the EU.
The report (PDF) draws three main recommendations on taxing the digital economy: that existing tax regimes should be adapted to digital companies rather than separate 'digital taxes' created; tax regimes should be made more "simple, stable and predictable"; and tax incentives should be approached with caution.
On the subject of tax avoidance, the report highlights that EU member countries need to adopt a single stance on the practice, and avoid having competing regimes that allow companies to headquarter themselves in low-tax countries to avoid paying significant taxes in the other states where they operate.
The EU's best hope of cracking down on tax avoidance comes from the work of the OECD on BEPS (base erosion and profit shifting ) — tax planning where companies use disparities between tax regimes in member states to reduce the amount of corporation tax they pay in particular countries to almost zero.
"The commission should encourage EU member states to pursue gradual global recognition and adoption of the notion that attracting foreign investment and business activity should not be an excuse to compromise on international partnership and cooperation," the report says — in other words, EU members have a duty to use what mechanisms they can to prevent a company paying their fair share of tax in every country where they operate.
The group also recommends that Europe should overhaul its transfer pricing rules — moving profits from higher-tax countries to lower-tax countries. "One of the key sources of public and political concern with respect to the taxation of multinational companies is that profits are not appropriately taxed where business activities take place. Transfer pricing rules therefore require a fundamental review," the report says.
It also tackles the question of how to establish whether a digital business has established a taxable presence in a country. There have been calls from some parties to establish a legal provision that any company collecting data on a country's citizens should then have taxable presence there, but the group disagrees. Rather than producing new legislation to that effect, the group says that existing models for determining where multinationals have taxable presences should be reviewed.
The OECD should work on determining "under what circumstances sales of goods or services of one company in a multinational group" should constitute having a taxable presence.
If the group's recommendations are followed, it could see the likes of Google and Amazon paying a greater share of tax across the European Union.
EU tax commissioner Algebras Bemata sums up the report: "First, the EU must throw its full collective weight behind international efforts to clamp down on tax avoidance. Member States must speak with one voice, reflecting shared priorities... I particularly welcome the emphasis that the report puts on tackling harmful tax competition, and the recognition that this involves more than just abolishing harmful regimes.
"The Commission will now carefully study the group's findings, and draw on them when considering future policy orientations."