The European Commission Is Attempting a Radical Change to How Digital Transactions Are Taxed Throughout the EU

On 21 September 2017, the European Commission issued a fact sheet outlining its plans to design and propose significant new international tax rules to be applied to all digital transactions and commerce.

The fact sheet first describes the difficulty of ensuring that companies operating within the EU digital single market are taxed appropriately and then sets out the Commission’s long term objectives and short term alternative solutions.

• The Commission’s proposals would radically change the well-established, universally-followed standard for tax nexus.
• The permanent establishment standard would be replaced with a “significant economic presence” test which would focus on where the marketing and consumption was occurring.
• If adopted, the Commission’s proposals could significantly impact the tax compliance and economic burdens of companies selling digital products and services in the EU.

This Alert addresses what we know about the Commission’s initiative and Cleary’s insights on what the initiative might mean for multinationals with operations, customers or counterparties in the EU. We suggest that senior management and boards of directors closely monitor these developments.