'Today's tax systems were conceived in a pre-computer age': Europe ponders digital tax rethink

Europe is looking to sort out the online firms that avoid paying their fair share of tax on the continent.
Written by Jo Best, Contributor

The European Commission is taking some first steps to tackling the problem of tax avoidance by online companies.

On Tuesday, the EC announced the creation of a high-level "expert group" that will be charged with working out how best the European Union can make sure that digital companies are paying their fair share of tax. 

"Today's tax systems were conceived in a pre-computer age. So it is no surprise that they often clash with the modern, digital economy...We must also ensure that the digital sector plays fair and pays fair. The challenges linked to taxing the digital economy are immense and there are no ready-made answers. Therefore, we need deep, informed and focused reflection on this issue within the EU, to ensure that the next steps we take are the right ones," European commissioner for taxation Algirdas Šemeta said in a statement.

A number of high-profile web companies have attracted criticism from politicians over an entirely legal tax avoidance measure, whereby the firms choose one country for their European headquarters and deem local operations to be subsidiaries mainly involved in marketing and fulfilling the orders that consumers in individual European countries have placed with the European HQ, often located in Ireland.

The HQ operates by licensing the IP of the firm, usually for a fee almost equal to its profits, which it pays to another subsidiary based in a low-tax country. As a result, while some web companies may do billions of euros of business in a country, the tax they pay there may be just a matter of a few million euros.

The seven-person group set up by the EC will study the problems with the EC's current tax regime, and the various measures that could be used to improve it. It's expected to deliver its findings in summer next year, and the EC will then update tax law to put the group's recommendations into practice. 

"Corporate tax avoidance and aggressive tax planning are particularly problematic in the digital economy. This is due to the global and intangible nature of these companies, and the fact that today's tax rules were not designed with e-commerce in mind. As a result, the taxes paid by the digital economy are frequently not in line with the presence and profits of this sector in the EU," the EC said.

The EU has already begun working with the OECD and the Australian government on anti-tax avoidance approaches.

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