Digitalization and Taxes: Future Taxation

With the rise of the digital economy, companies often no longer need a physical operating site in a country to operate there. With the current taxation model, a country in which the company operates without a physical presence cannot collect taxes from it. The international community is working on models to solve this issue.

EU already has ideas

As described in our last post, some countries have already decided on measures to tax these companies. These measures are referred to as the so-called "Netflix Tax". However, these are only short-term solutions because the double taxation agreements do not cover these taxes. The international community must therefore find a new, common taxation model together. The OECD and the EU are already working on regulations for the future.

One concept of how digital companies could be taxed introduces the term "virtual operating site". The EU in particular is considering this solution. The European Commission describes the virtual operating site in a draft directive as a "significant digital presence", which is met when the company generates turnover of over 7 million euros in an EU state, or has 100,000 users in a member state, or has concluded over 3000 online contracts in a member state. If one of these conditions is met, the revenue from these digital services should be taxed. This concept would be a pragmatic solution as it extends the current taxation from companies with physical operating sites to those with virtual sites. Until a long-term solution is finalized, digital services in the EU can be taxed at 3% regardless of company profits.

However, EU ministers are divided on whether a unilateral EU solution could stand in the way of a global solution currently being developed by the OECD. The OECD report is expected by 2019.

Position of Switzerland

As a location for many international companies, a change in international taxation rules would have significant impacts on Switzerland, which is a member of the OECD and is thus also involved in the development of an international solution. On March 8, 2018, the State Secretariat for International Financial Matters (SIF) explained Switzerland's position within the OECD. It particularly wants to adhere to the principle that taxes should be raised where value is created and emphasizes avoiding double or excessive taxation. Own, short-term solutions should only be introduced if no international solutions are found. However, these unilateral regulations should be temporary.

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