EU explores taxation options for a digital economy

G7 Finance Ministers and Central Bank Governors (FMCBGs) met in Chantilly on July 17th and 18th, 2019. They reaffirmed the importance of their close cooperation to address the current and future economic and financial challenges and committed to work together for a more inclusive, equal and sustainable economic model.

G7 France reports that considering the need to improve the current international tax framework, without undermining its principles, finance ministers agreed that it is urgent to address the tax challenges raised by the digitalization of the economy and the shortcomings of the current transfer pricing system. Ministers therefore fully supported a two-pillar solution to be adopted by 2020 through the work programme endorsed by the G20 Leaders.

Under the first pillar, new nexus rules should be developed to address new business models, such as highly digitalized business models, allowing companies to do business in a territory without any physical presence.

In addition, tax certainty should be reinforced and aggressive tax planning should be limited, in particular for the transfer pricing of distribution activities.
The new taxing rights under pillar one could be determined by reference to criteria reflecting the level of businesses’ active participation in a customers’ or users’ jurisdiction, such as valuable intangibles or employment of a highly digitalized model, on which ministers agreed that the OECD should further reflect.

The new rules should be administrable and simple.

Ministers also agreed that, in order to avoid double taxation and ensure the stability of the international tax system, robust and effective tax dispute resolution through mandatory arbitration must be a component of this global solution.

Under the second pillar, ministers agreed that a minimum level of effective taxation, such as for example the U.S. GILTI regime, would contribute to ensuring that companies pay their fair share of tax. The tax level to be set would depend on concrete design features of the rules.

The G7 looks forward to further progress in the context of the G20 and a global agreement on the outlines of the architecture by January 2020 at the level of the Inclusive Framework on BEPS

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