Author: Paul Verhaeghe
- Music, movies, books and cloths are in large numbers ordered through websites. But the producers of goods frequently have websites themselves where they propose to sell and ship directly to the client.
So the criterion of ordering goods through digital interfaces is far too wide to constitute a relevant digital activity.
- Some companies like Apple are manufacturing products that can be described as the digital interfaces themselves. These goods form a substantial part of digital economy for they form the tools of connectivity.
Such goods would include cell phones, tablets, computers, screens and touchscreens but also the software needed to operate these digital interfaces.
The production costs of such goods are typically far less expensive than their selling price. These digital interfaces are under patent rights that take up a substantial part of their selling price that largely exceeds the historical development cost. Such rights dislocate substantial parts of the profit tax base in the Member State where the sale and payment of the price occurred.
- But if all companies that sell such goods were to be included, a company that sells all kinds of electronic equipment could also be included. Even very small companies who do not necessary have the means to proceed to any tax engineering whatsoever.
And global players such as Amazon would only be taxed on that segment of their turnover represented by such goods. This business model covers buying and reselling goods through digital interfaces, digital communications and digital payment. Again, a substantial part of the profit tax base originated through the sale and payment in the Member State, is dislocated through payment of rights to use the website.
- Given these general considerations, a business model criterion for direct taxes in digitally selling goods could be defined as goods sold in the Member State (A) which include in their price a substantial cost of rights (a 1) or rights calculated on the profits / turnover made by selling these goods (a 2) which are payable to companies of the group, the company or the Permanent Establishment (a 3), or sold in the Member State (B) by orders received through internet or call-centres (b 1) when a minimum lump sum cash flow (*) is originated from the Member State (b 2).
(*) the criteria mentioned in Council Directive (EU) 2016/116 of 12 July 2016, could serve as a minimum reference
This definition includes both business models like Apple or Amazon.
- Selling goods normally requires facilities on the territory of the Member State. Most companies that fall under these business models’ criteria also fall under existing Permanent Establishment’s criteria.
These business models are best addressed through BEPS, CFC’s and specific tax measures that comply with the requirements of article 65 (3) of the TFUE or the case-law of ‘overriding reasons of public interest’.
Ordering and shipping goods that fall under this business model, from outside the Member State or the European Union, and that give no cause for location criteria under OECD criteria, would best be addressed by indirect tax tools.
These business models are therefore not considered for establishing a Permanent Establishment by non-fiscal law requirements.
