Despite Brexit, we are trying to move forward and keep working on other initiatives that would help European companies to expand their businesses. Last week I organised a breakfast debate with the European Internet Forum to discuss taxation in the digital economy.
When we talk about the reasons why businesses don’t want to sell cross-borders online, the most cited obstacle is often the declaration, calculation and payment of VAT. The process is far too complicated due to the different sets of rules that companies face in each Member State – in one MS you must have a bank account in order to pay taxes, in another all declarations must be filled out in the local language and so forth. There is little information in English about what businesses need to do to be law-abiding.
Another big debate in taxation in the digital economy is centered around the question of where a company should pay their taxes. If a company is registered outside Europe or in one Member State, but earns its income in another, and the citizens of the latter state are using their services, it would seem unfair if the company didn’t provide a tax return. Yet we wouldn’t want to tax the same product or service in several member states. The most elegant solution would be to tax the service in the state where added value is created. But how do we define where that is? Do we need to trace people and put them through bureaucracy in order to know? Or is there an easier way to find out?
A third issue relates to the sharing economy. Indeed, one of the main arguments against the collaborative economy is that “they don’t pay taxes”. However, if everything is digital, then it should be quite easy to calculate taxes even for these new kinds of businesses.
Highlights from last week’s seminar
The magic of the Internet is that companies can find consumers for their services and products from around the world. You start a company with the assumption that your market is global. Nonetheless, wishing to do things correctly, the entrepreneur soon faces problems – how to deal with all the bureaucracy that comes with registering and declaring your taxes. This forces the entrepreneur to direct their energy away from their main task – developing their ideas.
International taxation rules were agreed in the 1920s, and clearly they couldn’t take into account the internet-related problems we are facing now. The European Union and its Member States have realized that the current rules are outdated, as they don’t consider situations where the place of created turnover is unclear. For online companies, this problem is crucial.
Although the Luxleaks scandal has reopened the tax debate in Europe, the predominant view still is that tax policies should be regulated locally – an arrangement they are certainly eager to preserve. At the same time, the EU wants to take steps to make businesses’ lives easier. Thus, on January 1, 2015 MOSS (mini-one-stop-shop) entered into force to help telecommunications, TV and broadcasting companies easily manage VAT issues.
Harmonization of regulations takes time and considering the Member States’ opposition, it is not easy to bring it about. However, in my opinion, we wouldn’t violate national sovereignty by developing a pan-European technical solution through which businesses can pay their VAT without the current complexities. They would just have to enter the necessary data, and the system would calculate the required tax itself. At the end of the day, information required is the same for all companies. The base rate is the same for everyone. This would also be a logical step towards a more integrated single market. Currently, entrepreneurs often fail to declare their cross-border sales, or refuse to sell to the citizens of another member state. If the payment of taxes were simple, this would also increase tax revenue.
Further, we should bare in mind that all the transactions of online companies are digital, therefore all their operations with money leave a digital mark. Just as the Estonian Tax Board created a solution for Uber drivers to declare their digital transactions with one click, we should be able to find a way to pay the VAT on these operations. In fact, we only need to register the location of the second party of the transaction, and thereby define where to send the VAT. Member States’ tax authorities could collect these declarations and settle them with the relevant authorities in other countries.
It would be terrific if the European Union ordered this technical solution from emerging startups, who could perhaps offer such streamlined solutions, as policymakers cannot even think of. It would be a win-win situation, where the European startup community could come up with creative ideas, and when the platform is already running, all online companies would benefit from it. It would also improve the collection of VAT.