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The future of corporate taxation in a digital world
It is relatively straightforward for governments to tax brick-and-mortar single-establishment retail stores or factories that mostly sell locally because the value those businesses create and the profits they make are largely tied to a clear physical location. In those cases, production and sales processes take place where the company’s employees work, which is also where its consumers live. For other businesses, however, production, sales, and other elements of value creation are unbundled and cannot be assigned to a single location, which poses challenges to existing measures of corporate income and value added.
These challenges may be most severe in the case of multinational corporations that rely heavily on intangible capital and draw their revenue from online activities. The European Commission recently proposed two directives to address the challenges of taxing the digital economy.
The first proposal, which is meant to provide a permanent framework, effectively expands the notion of a firm’s location to incorporate a so-called digital presence. The policy is similar to South Dakota’s effort to collect sales tax from online retailers (the subject of the pending Supreme Court case South Dakota v. Wayfair Inc.), but it extends beyond retailers to include any firm that derives sufficient online revenue from, or has sufficiently many users in, a member state. Skeptics worry that this framework would limit tax competition between different EU countries by effectively shifting from an origin-based tax system (with businesses taxed where they produce) to a destination-based tax system (with businesses taxed where their customers are located).
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The second proposal is more narrowly focused and is intended to be an interim solution that will be applied until the first proposal is fully implemented. This controversial proposal has generated headlines and triggered pushback on this side of the Atlantic. It imposes a 3 percent tax on the gross revenue — not the profits — of large firms that either sell online ads or operate social media networks in the member states. The professed rationale is that it is the users who create value in those lines of business.
How will these proposals work? Who will they help and harm? Conveniently for readers of this post, Pierre Moscovici, the European Commissioner for Economic and Financial Affairs, Taxation, and Customs, will come to AEI on Thursday, April 19 to present and discuss the commission’s proposals. His appearance will be followed by an expert panel composed of Professor Itai Grinberg of Georgetown Law Center; Professor Joann Martens Weiner of George Washington University; William Morris, the deputy global tax policy leader at PricewaterhouseCooper; and Stephen Quest, the director general for Taxation and Customs Union at the European Commission. I am confident that these distinguished speakers will answer all of your — and my — questions on this important topic.
RSVP for the event here.