COMMISSION EXPERT GROUP ON TAXATION OF THE DIGITAL ECONOMY

COMMISSIONEXPERT GROUPON TAXATIONOF THE DIGITALECONOMYReportDate: 28/05/2014All members of the Expert Group contributed as independentexperts not representing their employers or organisations. Theviews set out in this report are those of the members of the ExpertGroup and do not necessarily reflect the official opinion of theCommission or of the employers and organisations for which themembers of the Expert Group work.Taxation andCustoms Union

Report of the Commission Expert Group on Taxation of theDigital EconomyTABLE OF CONTENTSPREFACE . 4EXECUTIVE SUMMARY . 5LIST OF ACRONYMS . 91.DIGITAL ECONOMY: FACTS, TRENDS AND DEVELOPMENTS . 111.1. Characteristics of the digital economy . 111.1.1.Mobility1.1.2.Network effects . 12. 111.1.3.Importance of data . 121.2. Defining and measuring the digital economy . 131.3. Trends in the digital economy . 151.4. Digital challenges for the EU . 152.INTERNATIONAL TAXATION IN THE DIGITAL ECONOMY . 172.1. Principles of taxation . 172.1.1.General economic efficiency . 172.1.2.Economic efficiency in an international setting. 172.1.3.Distributional equity . 192.1.4.Compliance and administration . 202.2. Business models in the digital economy . 212.2.1.Description of relevant digital business models . 212.2.2.Digital business models and their tax implications. 222.3. The G20/OECD 'BEPS' project . 233.2.3.1.BEPS general . 232.3.2.BEPS and the digital economy . 24DELIVERING DIGITAL EUROPE . 263.1. Introduction . 263.2. Policy options . 274.3.2.1.General policy options . 273.2.2.Specific tax measures . 283.2.3.Creating a digital environment for taxation . 29VAT POLICY OPTIONS . 314.1. Issues related to VAT . 3128/05/20144.1.1.Introduction . 314.1.2.Business to Business (B2B) transactions . 314.1.3.Business to Consumer (B2C) supplies of electronic services . 324.1.4.B2C supplies of services other than electronic servicessupplied over the internet . 334.1.5.Remote supplies of goods in B2C transactions . 33Page 1 of 78

Report of the Commission Expert Group on Taxation of theDigital Economy4.1.5.1. Remote supplies of goods from within the EU . 334.1.5.2. Remote supplies of goods from third countries . 344.1.6.Mini One Stop Shop (MOSS): collection and audit . 354.1.7.Distortionary effect of VAT rates in cross-border B2Cservice transactions . 354.1.8.Complexity of VAT rates and ensuring compliance . 364.2. VAT policy options . 364.2.1.Vision for the role of VAT in the taxation of the digitaleconomy . 364.2.2.Delivering a successful MOSS . 374.2.3.A broader OSS . 374.2.4.Removing the small consignments exemption andincluding low valued imported goods within the One StopShop . 385.4.2.5.Supporting the destination principle at a global level agreements with third countries . 394.2.6.VAT rates . 39CORPORATION TAX POLICY OPTIONS . 415.1. Main corporation tax issues in the digital economy . 415.1.1.Introduction . 415.1.2.G20/OECD BEPS project - analysis. 415.2. Short and medium term policy options . 435.2.1.Counter harmful tax practices . 435.2.1.1. Address hybrid mismatch arrangements . 445.2.1.2. Apply effective CFC provisions . 445.2.1.3. Prevent circumvention of withholding tax oninterest and royalties through treaty shoppingstructures . 455.2.2.Review transfer pricing rules . 455.2.2.1. Profit allocation to intangibles . 465.2.2.2. Profit allocation to risks . 465.2.3.Restore taxable nexus provisions . 475.2.3.1. No new concept of "digital taxable presence" . 475.2.3.2. Review the PE concept . 485.3. Long term policy options . 49ANNEX 1: TECHNOLOGICAL TRENDS . 51ANNEX 2A: TAX OVER INCOME AND SALES – MAJOR DIGITAL COMPANIES . 54ANNEX 2B: TAX OVER INCOME AND SALES – MAJOR NON-DIGITALCOMPANIES . 55ANNEX 3: INTERNATIONAL TAX POLICY – THE INSTITUTIONAL FRAMEWORK . 5628/05/2014Page 2 of 78

Report of the Commission Expert Group on Taxation of theDigital EconomyANNEX 4. EMPLOYEE TAXATION AND SSC ON STOCK OPTIONS AND SHARESCHEMES . 70ANNEX 5: CAPITAL GAINS – GENERAL TAX TREATMENT FOR INDIVIDUALS INTHE EU . 72ANNEX 6: VAT – PREPARING FOR THE 2015 PLACE OF SUPPLY RULES ANDMOSS . 7628/05/2014Page 3 of 78

Report of the Commission Expert Group on Taxation of theDigital EconomyPREFACEThe High Level Expert Group on Taxation of the Digital Economy was established byCommission Decision C(2013)7082 final of 22 October 2013. The Group had a chairand six members that were selected following a call for applications. The Group wascomposed as follows: Mr Vítor Gaspar (Chair), Special Advisor to the Banco de Portugal; Mr Pierre Collin (member); Membre du Conseil d'Etat, France; Mr Michael Peter Devereux (member), Professor at Oxford University, UK; Mr Jim Hagemann Snabe (member), co-CEO of German based SAP AG; Ms Tea Varrak (member), Innovation and Business Centre ‘Mektory’, Estonia; Ms Mary Walsh (member), Independent Consultant, Ireland; Mr Björn Westberg (member), Professor at Jonkoping International BusinessSchool, Sweden.The Group met four times in Brussels to complete its work: on 12 December 2013,on 14/15 January 2014, on 13/14 March 2014 and on 24/25 April 2014.During the term of the Group Mr Pierre Collin was appointed as member of thecabinet of Mr Moscovici, Minister of Finance in France. He continued participating inthe Group's meetings and contributed to the Group's analysis. However, to avoid apotential conflict of interest, Mr Collin did not intervene in the establishment of theGroup's final conclusions.28/05/2014Page 4 of 78

Report of the Commission Expert Group on Taxation of theDigital EconomyEXECUTIVE SUMMARYThe economy is becoming digital. Digitalisation is the process of spreading of ageneral purpose technology. The last similar phenomenon was electrification.Digitalisation of products and services shortens distances between people andthings. It increases mobility. It makes network effects decisive. It allows the use ofspecific data to such an extent that it permits the satisfaction of individual customerneeds – be it consumers or businesses. It opens up ample opportunities forinnovation, investment, and the creation of new businesses and jobs. Going forwardit will be one of the main drivers of sustainable growth.The High Level Expert Group on Taxation of the Digital Economy (henceforth “theGroup”) believes that digital technology offers great opportunities for Europe. Europecan boost its prospects for growth and jobs if it realises the Digital Single Market andif it taps the digital potential of the Single European Market. The Group is alsopersuaded that digital technology offers the means to strengthen the fight againsttax evasion and avoidance, while, at the same time, lowering administrative andenforcement costs. Hence it is feasible to have a tax system that is capable ofcollecting tax revenues effectively while, at the same time, enhancingentrepreneurial risk taking. The Group discussed extensively the principles thatshould guide international taxation. It identified economic efficiency, distributionalequity as well as efficiency and effectiveness in tax administration and enforcementas fundamental. More specifically tax systems should be simple, stable and, as far aspossible, neutral. The application of these principles leads to some generalconclusions: First: there should not be a special tax regime for digital companies. Ratherthe general rules should be applied or adapted so that “digital” companies aretreated in the same way as others. Second: digitalisation strengthens the case for simple, stable and predictabletax rules. Digitalisation lowers the costs for small and medium sizeenterprises to access the Single Market. Hence, a well-coordinated taxsystem, simple to comply with and to administer and inspired by bestpractices becomes a necessary condition for digital technology to realise itsSingle Market potential. Tax barriers for small and medium sized enterprises(SME) operating in the Single Market should be removed. Third: tax incentives and credits should be approached with caution and becarefully assessed both ex ante and ex post. In general any departure fromneutrality and simplicity should be justified on grounds of market failureincluding the benefits of positive externalities. In addition it is also necessaryto argue that tax instruments are effective and, indeed, the most effectiveinstrument to tackle market failure.The Group welcomes the general consensus that the destination principle – that istaxation at the place of consumption – is the way forward for VAT. Theoreticalreasoning and empirical evidence point to international tax neutrality for VAT. Hencethe Group is of the view that the Commission and Member States, in the field oftaxation, should commit to eventually apply the destination principle to all goods andservices. At the same time the Group supports the incremental approach proposed28/05/2014Page 5 of 78

Report of the Commission Expert Group on Taxation of theDigital Economyby the European Commission. In this approach the overall goal is pursued through aseries of initiatives that are carefully designed and monitored over time.The Group welcomes the implementation, in 2015, of the place of supply rules and ofthe mini One Stop Shop (MOSS). These new rules and procedures should provide, asexperience accumulates, the basis for further developments. In particular the Groupencourages Member States to coordinate their audit actions so as to avoid theaccumulation of excessive burdens on businesses. This aspect is fundamental forfurther developments.The Group is also of the view that a broader One Stop Shop (OSS) should beconsidered so as to encompass all B2C supplies of goods and services. A functionaland generalised OSS approach would considerably lower the cost for SMEs doingbusiness in the European Single Market. Tax administration and enforcement wouldbe crucial for success. Legislative initiatives, cooperative procedures and a significantamount of trust among national tax administrations would be required.One example where digital technology could be instrumental is the termination ofthe small consignments exemption. The abolition of the exemption could beenvisaged in the context of the introduction of a broader OSS. It would ensure alevel playing field between EU and non-EU suppliers.These considerations are also relevant at the global level. The Group is of the viewth

The Group met four times in Brussels to complete its work: on 12 December 2013, on 14/15 January 2014, on 13/14 March 2014 and on 24/25 April 2014. During the term of the Group Mr Pierre Collin was appointed as member of the cabinet of Mr Moscovici, Minister of Finance in France. He continued participating in