The governance of human societies has never been a simple matter. In the age of the nation-state, many believe that this task is becoming increasingly complex with each passing year, thanks in no small part to relatively young digital technologies which connect people in countless ways that often bear no relation to nationality.
The European Union (EU) has taken note of this trend, particularly of its implications on Europe's current tax codes, many of which originated at a time when e-commerce was hardly imaginable. Now, several of the EU's constituent bodies have taken on the job of contributing to the development of a tax regime that accounts for the complexities wrought by the international selling of goods and services, both tangible and otherwise, over the internet.
While publicly available documents on the subject do not make specific reference to cryptocurrencies or blockchain-integrated businesses and marketplaces, these entities will doubtless be impacted by forthcoming digital economy-tax codes. However, the European Court of Justice did rule that, as with fiat currency trading, the exchange of digital assets should be VAT-exempt.
The European Commission (EC) has described the creation of a "Digital Single Market" as one of its "10 political priorities," because it could add "EUR 415 billion per year to Europe's economy, create jobs and transform [the EU's] public services." According to the EC, a "stable tax framework for the digital economy" would be indispensable to such a market.
Generally speaking, any digital tax legislation would have to be implemented individually at the national level rather than across the entire EU, creating an urgent need for coordination lest inconsistent policies lay the groundwork for unfair competition or tax avoidance. Member state representatives plan to discuss possible tax schemes at the G20 meeting in April 2018, but the Union intends to "focus on EU solutions if progress at international level proves too slow." In any case, the EC "will continue to analyse the policy options … ahead of a possible proposal by spring 2018."
Among the questions that the EC considers important are "how to establish and protect taxing rights in a country where businesses can provide services digitally with little or no physical presence," and "how to attribute profit in new digitalised business models driven by intangible assets, data and knowledge."
The intergovernmental Organisation for Economic Co-operation and Development (OECD) has already taken steps toward designing such a tax regime. Though the OECD is not an EU body, "countries that are part of the consensus" are expected to implement its non-binding Base Erosion and Profit Shifting Project, which includes an "action" entitled "addressing the tax challenges of the digital economy."
The OECD has also been involved in a dialogue with the Economic and Financial Affairs Council (ECOFIN), an informal body "made up of the economics and finance ministers from all member states." The council typically holds monthly meetings that are also attended by "Relevant European Commissioners," during which it "coordinates member states' economic policies."
At a September 16 meeting, ECOFIN "agreed that a two-phased approach would be further assessed for viability: an initial phase would focus on the potential short term adoption of an equalization levy," which would be imposed "on the turnover generated in Europe by digital companies." Meanwhile, "a solution focusing on the Estonian suggestion of the adoption of a digital permanent establishment concept would also be studied by the European Commission as a longer term model … [A]greement on the longer term model could remove the need for an [equalization levy]."
Following the gathering, it appeared that "legislative language in relation to [a levy] could potentially be made available as early as the first quarter of 2018," and that this quick work on the part of ECOFIN might ratchet up the "pressure on the OECD, and could impact its proposed timeline" as it hurries to keep up.
Shortly thereafter, the EC issued a communication to European Parliament and the European Council, proposing the equalization levy as well as two other "shorter-term solutions." One was a "standalone gross-basis final withholding tax on certain payments made to non-resident providers of goods and services ordered online," and the other, a levy "on revenues generated from the provision of digital services or advertising activity."
The document's authors noted that, before implementing such measures, participating agencies would need to confirm their compatibility with certain commitments that the EU and its constituent bodies have previously agreed to, including "double-taxation treaties" and World Trade Organization rules.
At its December 5 meeting, (or perhaps at a preparatory gathering a few days earlier) ECOFIN "adopted conclusions on the taxation of profits in the 'digital economy'" which "will serve both as the EU's contribution to discussions at international level and a reference for further work at EU level," work that includes "legislative proposals [from the EC which are] expected early in 2018." These conclusions have not yet been made public.