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Taxing the Digital Economy - A Legal Assessment of the Introduction of PIllar One to the Internal Market

Ramanauskaite, Gabija LU (2021) JURM02 20212
Department of Law
Faculty of Law
Abstract
In the last decade, the progress of the digital economy has caused a rift in the international tax regime, which now faces several challenges. The current principles governing taxation rules are based on notions that business can only be conducted through physical presence. Consequently, these principles have been pushed to their edge as the present-day enterprises have found new ways to conduct businesses without the need of a physical presence in the market jurisdiction. According to the current rules of international taxation, an enterprise is only liable for tax in a state where it has a certain degree of physical presence otherwise it is only liable for taxation in its residence state, or a state where the enterprise has a permanent... (More)
In the last decade, the progress of the digital economy has caused a rift in the international tax regime, which now faces several challenges. The current principles governing taxation rules are based on notions that business can only be conducted through physical presence. Consequently, these principles have been pushed to their edge as the present-day enterprises have found new ways to conduct businesses without the need of a physical presence in the market jurisdiction. According to the current rules of international taxation, an enterprise is only liable for tax in a state where it has a certain degree of physical presence otherwise it is only liable for taxation in its residence state, or a state where the enterprise has a permanent establishment. The current rules create an opportunity for aggressive tax planning schemes and tax evasion which enterprises are willing to utilize. To address these pressing issues the OECD has presented two proposals, Pillar One and Pillar Two, on how the digital economy could be taxed and the changes which would have to be made.

The purpose of this thesis is to examine the legal possibilities of the introduction of OECD’s Pillar One into European Union law through a directive. Pillar One’s compatibility with some primary rules and principles of Union law are analysed, mainly the fundamental freedoms, articles 18 and 115 TFEU and the principles of subsidiarity and proportionality.

The primary conclusion that can be drawn from this thesis is that such a directive would face an uphill battle, even though it would be the most plausible way for the EU member states to fulfil their commitments within the OECD. Because of the way the scope of Pillar One is determined, based on a global turnover base, it cannot constitute direct discrimination through its objective criterion. However, it is up to the CJEU to decide as they could change the conclusion by applying the majority rule which would determine that Pillar One is discriminatory. Furthermore, examined against the other fundamental freedoms and especially the freedom of establishment, it can be concluded that Pillar One would not impede the freedoms even if arguments can be made for both sides.

In the way the framework is presented in the updated version of Pillar One it would not go beyond what is necessary to achieve the desired goals. Consequently, the principle of proportionality would not be breached. The fact that tax avoidance and evasion are global issues, which is unlikely solved by unilateral measures, it is more convenient for the European countries to accept a directive on the field of direct taxation. Furthermore, it would create a cohesive implementation which would strengthen the EUs position as a strong economic actor. Therefore, it can be concluded that a directive on Pillar One would be in accordance with the principle of subsidiarity. As for the unanimity requirement in article 115 TFEU, it remains to be seen if the European countries can set their differences aside and agree on the proposal. (Less)
Abstract (Swedish)
Under det senaste decenniet har den digitala ekonomins framfart orsakat en
spricka i de internationella företagsbeskattningsreglerna, vilka numera står
inför ett antal utmaningar. De nuvarande principerna för företagsbeskattning
bygger på föreställningen att verksamhet endast kan bedrivas genom en
fysisk närvaro. Följaktligen har dessa principer drivits till sin spets när
dagens företag har hittat nya sätt att bedriva verksamhet på utan ett behov av
fysisk närvaro i marknadsjurisdiktionen. Enligt nuvarande regler för
internationell företagsbeskattning är ett företag endast skattskyldigt i en stat
om företaget har en viss fysisk närvaro där, annars är det endast
skattskyldigt i sin hemviststat. De nuvarande reglerna skapar en... (More)
Under det senaste decenniet har den digitala ekonomins framfart orsakat en
spricka i de internationella företagsbeskattningsreglerna, vilka numera står
inför ett antal utmaningar. De nuvarande principerna för företagsbeskattning
bygger på föreställningen att verksamhet endast kan bedrivas genom en
fysisk närvaro. Följaktligen har dessa principer drivits till sin spets när
dagens företag har hittat nya sätt att bedriva verksamhet på utan ett behov av
fysisk närvaro i marknadsjurisdiktionen. Enligt nuvarande regler för
internationell företagsbeskattning är ett företag endast skattskyldigt i en stat
om företaget har en viss fysisk närvaro där, annars är det endast
skattskyldigt i sin hemviststat. De nuvarande reglerna skapar en möjlighet
för aggressiv skatteplanering och skatteflykt, vilket vissa företag är villiga
att utnyttja. För att ta itu med dessa problem har OECD lagt fram två
förslag, Pelare Ett och Pelare Två, om hur den digitala ekonomin skulle
kunna beskattas och de förändringar som är nödvändiga att göra för att
problemen digitaliseringen har medfört ska dämpas och potentiellt helt
försvinna.

Syftet med denna avhandling är att undersöka de juridiska möjligheterna att
införa Pelare Ett i unionsrätten genom ett direktiv. Den första pelarens
förenlighet med relevanta EU-rättsliga regler och principer analyseras,
främst art. 18 och 115 FEUF, de grundläggande friheterna samt
subsidiaritets- och proportionalitetsprinciperna.

En av slutsatserna som kan dras av denna avhandling är att ett sådant
direktiv skulle stå inför en rad utmaningar, även om det skulle vara det mest
rimliga sättet för EU:s medlemsländer att uppfylla sina åtaganden inom
OECD. Med beaktande av att omfattningen av Pelare Ett bestäms utifrån en
global omsättningsbas, kan kriteriet inte utgöra direkt diskriminering
eftersom det är objektivt utformat. Det är dock upp till EUD att besluta i
denna fråga, eftersom en tillämpning av majoritetsregeln framtagen i Hervis
Sport domen hade medfört att Pelare Ett uppfyllt kriteriet och därmed varit
diskriminerande. Vidare kan man, granskat mot de grundläggande friheterna
och särskilt etableringsfriheten, konstatera att Pelare Ett inte skulle hindra
utövandet av friheterna som FEUF garanterar EU:s medborgare.

Slutligen, på det sättet som ramverket för Pelare Ett presenteras i den
senaste versionen från OECD, skulle ett direktiv inte gå längre än
nödvändigt för att uppnå målen med lagstiftningen. Därmed skulle
proportionalitetsprincipen inte åsidosättas. Faktumet att
skatteundandragande och skatteflykt är globala problem, medför att det är
osannolikt att problemen skulle kunna lösas genom ensidiga åtgärder. Ett
direktiv på det direkta beskattningsområdet skulle vara mer lämpligt
eftersom området hade harmoniserats i det avseendet och det skulle vidare
stärka EU:s ställning som en stark internationell aktör. Därför kan man dra
slutsatsen att ett direktiv som genomför regeländringarna som Pelare Ett
föreslår, skulle vara förenligt med subsidiaritetsprincipen. När det gäller
kravet på enhällighet i art. 115 FEUF, återstår det att se om de europeiska
länderna kan lägga sina meningsskiljaktigheter åt sidan och enas om
förslaget. (Less)
Please use this url to cite or link to this publication:
author
Ramanauskaite, Gabija LU
supervisor
organization
course
JURM02 20212
year
type
H3 - Professional qualifications (4 Years - )
subject
keywords
EU Law, International tax law, OECD, Pillar One, Nexus
language
English
id
9070094
date added to LUP
2022-01-23 16:46:52
date last changed
2022-01-23 16:46:52
@misc{9070094,
  abstract     = {{In the last decade, the progress of the digital economy has caused a rift in the international tax regime, which now faces several challenges. The current principles governing taxation rules are based on notions that business can only be conducted through physical presence. Consequently, these principles have been pushed to their edge as the present-day enterprises have found new ways to conduct businesses without the need of a physical presence in the market jurisdiction. According to the current rules of international taxation, an enterprise is only liable for tax in a state where it has a certain degree of physical presence otherwise it is only liable for taxation in its residence state, or a state where the enterprise has a permanent establishment. The current rules create an opportunity for aggressive tax planning schemes and tax evasion which enterprises are willing to utilize. To address these pressing issues the OECD has presented two proposals, Pillar One and Pillar Two, on how the digital economy could be taxed and the changes which would have to be made. 

The purpose of this thesis is to examine the legal possibilities of the introduction of OECD’s Pillar One into European Union law through a directive. Pillar One’s compatibility with some primary rules and principles of Union law are analysed, mainly the fundamental freedoms, articles 18 and 115 TFEU and the principles of subsidiarity and proportionality. 

The primary conclusion that can be drawn from this thesis is that such a directive would face an uphill battle, even though it would be the most plausible way for the EU member states to fulfil their commitments within the OECD. Because of the way the scope of Pillar One is determined, based on a global turnover base, it cannot constitute direct discrimination through its objective criterion. However, it is up to the CJEU to decide as they could change the conclusion by applying the majority rule which would determine that Pillar One is discriminatory. Furthermore, examined against the other fundamental freedoms and especially the freedom of establishment, it can be concluded that Pillar One would not impede the freedoms even if arguments can be made for both sides. 

In the way the framework is presented in the updated version of Pillar One it would not go beyond what is necessary to achieve the desired goals. Consequently, the principle of proportionality would not be breached. The fact that tax avoidance and evasion are global issues, which is unlikely solved by unilateral measures, it is more convenient for the European countries to accept a directive on the field of direct taxation. Furthermore, it would create a cohesive implementation which would strengthen the EUs position as a strong economic actor. Therefore, it can be concluded that a directive on Pillar One would be in accordance with the principle of subsidiarity. As for the unanimity requirement in article 115 TFEU, it remains to be seen if the European countries can set their differences aside and agree on the proposal.}},
  author       = {{Ramanauskaite, Gabija}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Taxing the Digital Economy - A Legal Assessment of the Introduction of PIllar One to the Internal Market}},
  year         = {{2021}},
}