The Estonian presidency of the EU released a document prepared for the meeting of the EU Finance Ministers on September 15, 2017 in Tallinn, Estonia. The meeting will discuss how to plug evasion by digital multinationals, and the document alleged that the current legal framework should be amended as it in effect favors digital companies.
Tax on Digital Economy and Permanent Establishment Cases
Tax principles currently accepted by most countries and organizations (such as OECD, UN, etc.) require physical presence in a country for the purpose of income tax. This creates quarrels over definition of permanent establishment. In a digital economy, multinationals can operate their business online in certain countries without the need of having a physical office or staff there. Thus, these companies derive a huge profit in a country without a permanent establishment and only pay a small amount of tax.
In February, 2017 Google in France was released from liability for 1.1 billion euro billed by French authorities, as court ruled that Google had no permanent establishment in France. Similarly, the recent Airbnb case shows the same issue, as the online platform was accused of not paying a fair share of tax on its income in France.
Estonia Proposal: Change the Connotation of Permanent Establishment
In the proposal the concept of “permanent establishment” in international tax rules is recommended to be changed or broadened. It suggested that a “virtual” permanent establishment should be sufficient for the tax purpose. In this case, digital multinationals could be taxed where they create value even without a physical presence. To avoid a stark resistance, the issue will be discussed in the next months and a common position is expected to be reached in December, according to the proposal.
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