Europaudvalget 2017-18
KOM (2018) 0148 Bilag 4
Offentligt
REASONED OPINION
OF THE
HOUSE OF REPRESENTATIVES OF MALTA
Proposal for a Council Directive laying down rules
relating to the corporate taxation of a significant digital presence COM (2018) 147
and
Proposal for a Council Directive on the common system of a digital services tax on
revenues resulting from the provision of certain digital services COM (2018) 148
1. Aim of the Commission Proposals
This proposal package aims at addressing the issues raised by the digital economy by setting
out a comprehensive solution within the existing Member States' corporate tax systems. It
provides a common system for taxing digital activities in the EU which properly considers the
features of the digital economy. This proposal lays down rules for establishing a taxable nexus
for digital businesses operating across border in case of a non-physical commercial presence.
New indicators for such a significant digital presence are required to establish and protect
Member States’ taxing rights in relation to the new digitalised business models. This proposal
sets out principles for attributing profits to a digital business which rely on intangible assets.
2. Commission justification on compliance with the principle of subsidiarity
According to the first
proposal’s legal basis (Article 115 of the Treaty on the Functioning of
the European Union), the Council acting unanimously and according to a special legislative
procedure, and after consulting the European Parliament and the European Economic and
Social Committee, shall issue directives for the
approximation
of such laws, regulations or
administrative provisions of the Member States directly affecting the establishment or the
functioning of the internal market. Despite the Commission’s aims to eradicate distortions in
the functioning of the internal market, the Commission also aims to rein in unilateral measures
that have been, or are threatened to be, adopted by several Member States to address the same
issues, which could create confusion and fragmentation with the European Single Market. It is
already clear that not all Member States are aligned with the proposed measures. Given that
European legislation relating to tax can generally be passed only with unanimous consent, the
nature and timing of the successful enactment of this package remains uncertain.
The Commission’s proposal rests on the principle that profits should be taxed where value is
created, but with a significant twist: While the current rules largely allocate to a country, the
right to tax the profits of a business on the basis of the physical presence that the business
maintains within its borders
— which must be significant enough to amount to a “permanent
establishment” —
the proposal would extend this test to include, with respect to the provision
of digital services, the existence of a “significant digital presence.” In substance, this means
that where a non-resident
business provides “digital services” through a “digital interface” to
users “located” in a European Member State, and this business maintains a “significant digital
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presence”
in that Member State, the profits derived through this significant digital presence will
be taxable in the Member State in question.
The second proposal’s legal basis falls under Article 113 of the TFEU. This provision enables
the Council, acting unanimously in accordance with special legislative procedure and after
consulting the European Parliament and the EESC to adopt provisions for the harmonisation of
Member States’ legislation concerning other forms of indirect taxation to the extent that such
harmonisation is necessary to ensure the establishment and functioning of the internal market
and to avoid distortion of competition.
3. Evaluation on the compliance of the principle of subsidiarity
The House of Representatives of Malta notes that the principles of subsidiarity and
proportionality become relevant where the Union and the Member States share competence in
a sector in terms of the Treaty on European Union and the Treaty on the Functioning of the
European Union.
The House of Representatives of Malta retains that the proposed system of a Digital Services
Tax
infringes the principle of subsidiarity
for the following reasons:
1. The aim of the Proposal can be better achieved through long-term national solutions
coordinated at an international level rather than through the proposed European short-
term measures. It is believed that the suggested
interim
measures impinge on established
fundamental tax concepts and create more issues than solutions.
a. The legal basis of the Proposal, which seeks to approximate laws in relation to
corporate taxation is questionable given that the treatment proposed will
distinguish between entities established in EU Member States and entities
established in third countries which do not have a double taxation agreement
with an EU Member State, and entities established in third countries which
have double taxation treaties with an EU Member State in force. The
unavoidable result of such approach is that of a difference in treatment afforded
between Member States and third countries and Member States themselves
given that Member States have different treaty networks with third countries.
b. The Proposal impinges on fundamental tax concepts, such as that of the
permanent establishment, which is a key concept in the OECD Model Tax
Convention on Income and on Capital, which remains the most authoritative
source used by countries when negotiating conventions with each other.
2. The House of Representatives holds that the research and reports provided by the OECD
are merely guidelines provided for an international approach, however, the Commission
in this proposal goes beyond its scope and has thus decided to take action. This however
would imply impinging on
the Member States’ tax competence and
prove that there are
no strong arguments in terms of subsidiarity.
The Impact Assessment fails to meet the requirements of the principle of subsidiarity
for the following reasons:
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a. The Commission declares that the Proposal aims to steer discussions at
international level for long-term reform. Whilst one could understand the
political motivations of such an approach, it is believed that such aspects ought
to be subservient to evidence based policy action. Moreover, the Commission
states that this policy framework will be mirroring the changes in the OECD
Model Tax Convention at international level, thereby rendering the current
proposed measures redundant.
b. Illustrations of possible unilateral action by Member States as a justification for
taking legislative action appear pertinent for the Digital Service Tax initiative,
but seem to have little relevance for this initiative. This is more so when
considering that the changes to the permanent establishment provisions are
clearly part of the international tax framework and require international uptake
for their effectiveness, and the fact that OECD Base erosion and profit shifting
(BEPS) Inclusive Framework already aims towards a consensus based solution
by 2020.
c. The BEPS arguments are not constant throughout the Impact Assessment and
although used to justify the need for a Directive, it is also recognised that
changes to the permanent establishment provision (and profit attribution rules)
is a fundamental change to the existing international rules which go beyond
anti-BEPS measures. In this regard, whilst the baseline scenario of the Impact
Assessment assumes Anti-Tax
Avoidance Directive’s transposition, the
proposed text hardly elaborates why the application of these rules (within the
EU via ATADs, but also within third countries which are still coming on
stream) would not be pertinent developments to monitor before proposing this
Union action. It is pertinent to note that as highlighted in
the OECD’s interim
report, there is already “preliminary evidence that implementation of the BEPS
package more generally is having an impact”.
d. It disregards any consideration on the consequential impacts that the extended
permanent establishment would have on other distributive rules typically found
within Member States’ double taxation treaties.
e. The approach taken within the Proposal does not take cognisance of the needs
of smaller markets.
The Maltese House of Representatives recognises that there is a common interest in maintaining
a coherent yet relevant set of international tax rules in view of the digitalisation of the economy,
and it is ready to engage in the discussions which will ensue on the Commission proposals.
However, the Maltese House of Representatives has a clear preference to go for solutions at the
international level which are globally applicable. For this reason, the House of Representatives
supports working towards a consensus-based solution in the OECD BEPS Inclusive
Framework.
Furthermore, given the global aspect of the digital economy, it is important to avoid duplication
of work with the OECD and solutions in this area should ideally be found on a broader scale
and if solutions are found, these should serve as input into broader OECD discussions. It must
be stressed that unilateral EU measures may damage EU companies, thus it must be kept in
mind that a risk of damaging competitiveness of EU companies may also be present.
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4. Recommendation
For the reasons outlined above, the House of Representatives of Malta holds that less
intrusive choices can lead to the achievement of the objectives behind the common system
of a mechanism, both in the short term as well as in the long term, without interfering
with the principles of subsidiarity and proportionality. The House of Representatives thus
believes that the:
Proposal for a Council Directive laying down rules relating to the corporate taxation
of a significant digital presence (COM (2018)147); and the
Proposal for a Council Directive on the common system of a digital services tax on
revenues resulting from the provision of certain digital services (COM (2018) 148),
do not satisfy the subsidiarity principle.
The House of Representatives of Malta has decided to object to the Proposals and to
deliver this reasoned opinion in terms of the procedure defined in Article 6 of Protocol
No. 2 concerning the Application of the Principles of Subsidiarity and Proportionality,
annexed to the Treaty on the European Union and to the Treaty on the Functioning of
the European Union.
Anġlu Farrugia
Speaker
House of Representatives of Malta
May 2018