Risk of double taxation on digital services if proposals drafted by the EU and the OECD are turned into law

Proposals presented by the EU and the OECD aimed at introducing new taxation on the digital economy risk resulting in double taxation and new opportunities for tax planning. This is argued by law professor Pernilla Rendahl in a new SNS report.

There has been a concern in both the EU and the OECD for quite some time that tax bases are being eroded as a result of factors such as aggressive tax planning. Efforts to address these problems are carried out within the framework of the OECD project known as Base Erosion Profit Shifting (BEPS). At the core of these discussions is the issue of how digital business models should be taxed. The plan is that a new agreement on the proposal presented by the OECD is reached before the summer of 2021.

The main argument for altering the ways in which the digital economy is taxed is that the current tax system is unfair, partly because traditional companies are said to pay more in taxes compared to digital companies and partly as a result of how tax revenues are distributed between different countries.

In the SNS report “Consumption Taxation of Digital Services,” Pernilla Rendahl, professor of tax law at the University of Gothenburg, describes the proposed changes and discusses what constitutes fair taxation of the digital economy from a consumption tax perspective.

The proposals presented by the EU and the OECD involve changing how tax revenues are distributed between countries, which means increased taxation in countries where such services are consumed compared to, for instance, the country in which the company is physically located.

“How digital business models are identified and the extent of the changes will be decisive for the ability of states to tax digital companies and services. In practice, it is difficult to categorize a company as either ‘digital’ or ‘traditional’ as many companies are in the process of developing their digital operations,” says Pernilla Rendahl.

Criticism of the new proposals is primarily related to two aspects. First, the very notion that the current tax system is unfair and that it is not clear whether the proposed changes would in fact result in more fairness. Second, the proposals risk leading to parallel legal practices between, for instance, income and value-added taxation.

“These proposals are highly complex and there is a risk of double taxation as well as new opportunities for tax planning, which would counteract rather than promote fair taxation.”

Simultaneously, the value-added taxation system in the EU is also undergoing changes where, starting in July 2021, digital platforms such as Amazon and eBay will have a greater responsibility in terms of collecting taxes. Among other things, this change means that these platforms gain control over parts of the tax revenues of several countries.

“Here, an in-depth analysis is needed, not only with regard to what the increased responsibility of these platforms means from a fairness perspective, but also with regard to the risk of parallel legal practices and the possible consequences of this,” says Pernilla Rendahl.

This report is published within the framework of the SNS research project Taxes in a Globalised World.

Download Consumption Taxation of Digital Services, English summary.