The digital economy is a relatively new territory in the world of international tax competition, which one astute lawyer described as "a global trade war taking place under the guise of taxation".
The big technology players are US companies which pay as little tax as possible around the world where they carry on business. This is nothing new.
The EC study will decide if special treatment is justified in the case of these companies. It has called for "a comprehensive approach to taxing the digital economy to protect member states' tax bases."
To coincide with the digital tax expert group's formation Algirdas Šemeta, EC Commissioner for Taxation, said: "Currently corporate tax avoidance and aggressive tax planning are particularly problematic in the digital economy. This is due to the global and intangible nature of these companies, and the fact that today's tax rules were not designed with e-commerce in mind."
To some extent internet-based firms have got publicity for their tax affairs because they are household names and thus more vulnerable to public pressure, not because their tax structures are particularly devious.
A digital media tax, were it to exist, would get a selection of US companies to pay some tax in EU countries where they have markets.
"The main thing that is different about digital businesses is that they trade in data. So uploading of data could be separately taxed using a tax that is not an income tax. A byte tax would be a transfer tax," said Lee Sheppard of Tax Analysts.
"The beauty of taxing data for EU countries is that they could get at the mostly American digital economy players without the risk of subjecting their own companies to taxation."
European MNCs sell goods all over the world, and are vulnerable to expansions of tax jurisdiction.
"EU countries would like to avoid permanent establishment and jurisdictional issues because their own big companies would be caught when they sold into other countries where they had no physical presence," Sheppard said.
Changes in Global Taxation
Permanent establishment is a treaty-based limitation on tax jurisdiction to which Organisation for Economic Co-operation and Development (OECD) countries subscribe. It says that a non-resident company doing business in a source country is not subject to income tax on its activities unless it has considerable physical presence there.
In the face of rapacious accounting practices and reinterpretation of the permanent establishment (PE) concept, source countries have attempted to alter their domestic tax laws to get jurisdiction back.
India for example has taken a non-physical PE position, meaning companies selling into the country should pay tax based on "economic nexus" regardless of physical presence.
"The fact that these rules can be exploited often reflects a deliberate strategy of collusion between governments and companies," said Jason Sharman of Griffith University.
"Governments are not really sincere about wanting to solve the problem, because they are still very worried about losing national competitiveness, even though these worries seem very over-blown."
Global corporations don't pay tax because they make deductible payments of interest and royalties and such to affiliates in tax havens like Ireland and Switzerland. Deductible payments do not require the company to be in a high-tech business: Starbucks buys coffee from a Swiss affiliate, for instance.
Ireland with its relaxed tax laws and impressive roster of US technology company hubs will be an important representation in the group. Because of its technology affiliates, Ireland has become something of a global miscreant.
Sheppard describes Ireland in this equation as a "way station" for deductible payments: "a kind of tax laundry used to reduce taxable income in Europe".
Richard Murphy, director of Tax Research UK said: "Is it legitimate for any state to take the position that tax competition - a tiny net gain for Ireland - should be allowed to shift the burden of tax from capital to labour around the world? So countries like India, desperate for tax revenue for development, lose out to the Irish tax system."
France brings to the group a pedigree of energetically promoted data tax ideas.
Earlier this year the French government commissioned a report - "L'Age de la Multitude" - on taxing digital media companies. Its opening gambit drew upon internet billionaire Marc Andreseen's assertion that software is eating the world. The gap in taxation will become a tax black hole beyond anything imaginable, as data collection businesses devour entire industries.
In order to effectively mine and market data, companies like Google and Facebook depend on infrastructure, broadband networks, education and social insurance. These digital giants did not build that stuff, or pay for any of it. It was all paid for by massive public investment.
The Digital Economy
To top it off, these companies create relatively few jobs. As the digital economy keeps growing every sector's margins will be relocated abroad, disappearing from our GDP and depriving governments from additional revenue that should normally evolve from higher productivity.
The report argues that digital media companies blur the line between consumption and production: customers are involved in data production. This free work enhances the value of intangibles parked in tax havens. Royalty payments between affiliated companies - paid by market-country affiliates to tax haven intellectual property holding companies - are a standard tax dodge among MNCs.
Nicolas Colin from the Inspecteur des Finances, co-author of the report, does not advocate simply taxing data per se, but rather to use the tax to reward firms that act responsibly with their data.
He said: "This tax can be compared to the concept of a carbon tax, which grew out of the 1997 Kyoto Protocol on climate change. It would tax any company that collects data through regular and systematic monitoring - that refuses to comply with stronger privacy and user empowerment requirements. In the end it provides incentives to firms to better inform their users and open up APIs to enable smart disclosure."
The report's authors propose tax incentives, through a tax on the added value created by users, based on the number of users which could be used to encourage responsible data collection.
Long-term, they would like to see international agreements about how to tax MNCs in the digital economy. Pending this, national governments can devise local taxation schemes.
Philip Inglesant, EU analyst at The 451 Group, said: "The 'byte tax' - an old idea - is probably unworkable, not least because volumes of data transfer continue to increase rapidly - what seems like a low level of taxation one year becomes unsustainable the next.
"A tax on user-created data or, more accurately, user-tracking has the key difference that it aims to tax value rather than volume, but it could have unintended consequences for the digital economy.
"The definition of 'user' and indeed the concept of 'user data' are still vague: is it an account, an IP address, a user name, an individual person? From a technical point of view the choices made will define whether the initiative hits its intended target, and could also raise issues around privacy," Inglesant said.
Pierre Collin from the French Conseil d'Etat, who also authored the French report, is on the group, so we can assume that the ideas put forward in it will be on the table.
The other members are: Michael Devereux from Oxford University Centre for Business Taxation; Jim Hagemann Snabe, Co-CEO of SAP AG; Tea Varrak from Innovation and Business Centre Mektory in Estonia; Mary Walsh, Non-executive director and Consultant in Ireland; Björn Westberg from Jönköping International Business School in Sweden.
The group will be chaired by Vítor Gaspar, former finance minister of Portugal. The group's first meeting is on 12 December. It will report back to the EC in the first half of 2014.
Google, Facebook and Apple declined to comment on this report.
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