The European Commission’s Director General for Taxation and Customs Union tells International Tax Review about how the European Commission is pushing ahead with its plans for a digital tax framework, how it will work with OECD initiatives, and the emerging industries and technologies making their mark
30 January 2018
Much like his passion for alternative music and a band called The National, Quest has an admirable passion for his work. When talking to ITR's Anjana Haines in late 2017 about the tax areas on which he is focusing until 2020, the Director General was very enthusiastic and excited by the tax changes that will be happening. Quick progress is being made on establishing a digital tax framework, there is work going on behind the scenes in preparation for an EU network without the UK, and a lot of time is being dedicated to the technological advancements that have a tax impact.
Here, Quest openly discusses the matters that he feels are most important to the EU, its member states, the companies operating across the bloc and what the international business community should keep an eye on.
Anjana Haines: Let's start with the EU's digital tax plans. The recent consultation talked about three temporary solutions to the issues national governments are facing, and then moving to a more long-term solution. Which of these three temporary situations do you think member states will most likely adopt and why?
Stephen Quest: I think the honest answer is that it's too soon to tell. To rewind a second, because it's important to keep the context in mind, what we say in the communication is: The most important thing to do is to arrive at a global multilateral solution to the challenges that the digitalised economy poses to ensure fair taxation of the digitalised economy. So we want to work very closely with the OECD and G20 to try to find that multilateral solution.
In parallel, we think we need to look at European level to find appropriate solutions that work in our internal single market. And that makes a bridge with the common consolidated corporate tax base (CCCTB) proposals as well. In parallel to that broader, more structural work, there may also be need to look at some more targeted shorter-term measures, and we list some of those examples in the communication. Now that we have collected the views of stakeholders via the consultation, the views of member states, and the conclusions of the ECOFIN Council in December on the Communication that we presented in September, we'll be able to come up with a clear idea of what the sweet spot is and how we want to proceed.
AH: And just going back to the short term options, one concern is that a temporary solution to the digital tax framework could suffer the same consequence as the temporary VAT rules, which have been temporary for 23 years now. What are your thoughts about that? Is that a risk?
SQ: I think that there's, objectively, a difference between the VAT situation – we have what we called the transitional regime which was agreed in 1991/92, just before the single market came into force, which was a rush job because it wasn't possible with the time available to get the relatively limited number of member states at that point in time to align themselves because they already had things in place. So it was a problem aligning with what existed and harmonising it. And we didn't manage in 92/93 and we haven't managed since and now we're no longer looking to harmonise. We're looking to find a different way out of the transitional regime.
On the digital tax dossier it's different because, in a sense, the problem is not that we have to align a multitude of different treatments, it's that we have activities which are, in a sense, currently escaping the net. And so, collectively, it's more about how can we put in place measures that will help us to capture that activity and tax it in a fair way where the value is created. Long term, we think we have ideas about how we can do that. Short term, shorter-term targeted measures might have a role to play, but they would be different from the long-term measures. So the sequence is different – it's not that one is leading automatically to the other. And so I think the 'transitional' is subjectively a different type of transition if you want to view it that way. And so I'm not sure the analogy really works.
AH: So you just said that the VAT rules created in the early 1990s were slightly panicked and rushed, and in some ways it feels like the digital tax measures seem a bit rushed as well because France and Germany, for example, are saying: "We need something now. We want to target these companies that we are losing money from". There seems to be a sudden push to do this immediately, which is why there is a concern in how that policy may be implemented.
SQ: Yes, I hear that. I mean, the situations were different in the sense that the rush in 92 was that the single market was going to start and administrations had to know how to tax things. Here, the pressure is political. And I think it's important to understand the drivers for this, which are concerns about revenue loss and erosion of tax bases, as well as concern about fairness and unfair competition because digitalised business models have lower effective tax rates than bricks and mortar operations and that's something that I think national exchequers are becoming increasingly concerned about. So it's not so much that people are in a rush, but it's seen as a serious problem, as a relatively fundamental problem, and is something that needs urgent attention and therefore some short-term measures can potentially be beneficial in helping to resolve those issues.
AH: Going on to the multilateral issue, why has the EU decided to go ahead and build its own framework while the OECD is doing the same? Won't you have the same issues as previous policies where you're then having to work together to make sure everything is uniform? An extra layer of work, so to say.
SQ: Well, I think we've been very active players in the OECD discussions and the G20 discussions on this topic right the way through BEPS because BEPS Action 1 looked at the digital economy. The outcome there was not as ambitious as it maybe could have been or maybe with hindsight should have been but we got the outcome we got in BEPS 1 and we've continued to work very closely in that process in the task force on the digital economy and we remain fully engaged in it.
So why are we then at European level working on our 'own' as well? Well, firstly, so that we have a concerted EU position to take into the OECD and the G20 discussions – not 28 separate positions, but a concerted EU position, and it is very important that we actually find our own centre of gravity. That's the first answer.
The second answer is because we have our own single market with 500-plus million citizens and so it's perfectly appropriate that we would have, at European level, appropriate solutions for these fundamental challenges. In a sense, whether or not there are solutions at global level, we'd hope to have a solution that works at European level and that contributes positively to finding global solutions as well, because ultimately these things have to interact. So we want rapid progress at a global level, but we cannot simply sit and wait for progress at global level and do nothing at European level because we have a single market here to look after.
AH: So if the OECD, or any other international organisation, were to find a solution before the EU reaches an agreement, do you think you would adopt this approach?
SQ: Well, yes. Just look at the BEPS example. We worked very closely on BEPS throughout that process and we have led to the implementation of BEPS at a global level. And the EU has led the way with the Anti-Tax Avoidance Directive (ATAD) and with ATAD 2, and with all the other measures in place to actually implement legally the requirements of BEPS. And I don't see any reason why it would be any different on digital taxation. I think we've shown that we are very committed to a high level of implementation of international standards.
AH: On the EU digital tax framework, a lot of the digital businesses that responded to the OECD consultation, such as Spotify, said they don't want to see a bespoke tax regime for digital businesses. Where do you stand on that opinion?
SQ: Yes, I hear that argument. The objective here is not a bespoke regime for digital businesses to distinguish them from non-digital businesses – I'm not sure it's possible to do that because I think what we're talking about is the shift that's happening with the digitalising economy. That's impacting some businesses which are purely digital, but there are some which are both bricks and mortar and digital and there are some which are purely bricks and mortar. The challenge is: How do you effectively capture the value that is being created if operations are happening in a more intangible way and the current tax system fails to do that because it's fundamentally bricks and mortar and then territorially based. If you've got virtual intangible operations happening, there's a greater risk of escape. So it's not exclusively focused on digital-only businesses. It's more about looking at trying to capture the value that's being created in the digital economy and to tax it in a fair and balanced way.
AH: So you don't see a separate framework happening?
AH: In that case, in a similar fashion to the UK's diverted profits tax, do you think there's a risk that member states will start making policies unilaterally if the EU's actions are not agreed and implemented swiftly enough?
SQ: Yes. In fact that's a good additional answer to your earlier question: why are we going so fast? What we saw with ATAD was we had to go fast to avoid 28 different flavours of BEPS at the EU level, which is a risk. And I see exactly the same argument here that if we don't help manage and lead the debate at European level and ensure that we have a concerted EU position on these questions we will end up with 28 different flavours and that will be damaging for business and it will become a complete spaghetti of digital tax law at EU level and we can't have that. So we're trying very hard to avoid that happening and ensure that we have a clear and concerted and agreed position.
AH: So the framework that is being consulted on now is more about the intangible business and the bricks and mortar business. What about the technology of tomorrow – taxing robots is really growing in debate and discussion at the moment. How will the framework you put in place be able to accommodate those changes?
SQ: Well, that's a good question, but I can't answer that in its specificity because that's not part of what we're consulting on at the moment. It's quite possible that the answer to your question will be: Not at all. There's a lot of discussion out there about 'taxing the robots'. I think that discussion is in one sense still relatively immature, as we still don't know enough about what we're talking about to be able to get a clear policy grip on it, but it doesn't mean it's irrelevant. And I think the challenge for us as policymakers is to have an intelligent discussion about the implications of this.
The key question behind it is that if your tax system is built with a clear proportion of tax on labour and there is less labour to tax, it may be fine, but you have a tax base question to answer. So, for tax authorities at national level they are going to have to make their religion on that. It doesn't mean that therefore you have to tax the robots but it does mean that you've got a question to answer.
Fundamentally, tax doesn't exist in a vacuum, you're only taxing in order to provide social services and public services, so that's the question behind the question on how to ensure sustainability for tax bases.
AH: Just on labour quickly, I read that you used to work at the UK Department of Employment. What are your thoughts about the gig economy?
SQ: I think the gig economy, or the collaborative economy, has a huge potential to promote innovation: to let people get into the labour market, to allow diversification, and for different ways of doing business, different ways of generating value, and different ways of living as well, because it can induce huge flexibility.
At the same time, like any development it challenges your regulatory environment and you need to make sure, on the one hand, that your regulatory environment is permissive enough to enable people to do things in potentially new and creative ways. But at the same time there's a sufficient amount of protection that it doesn't become abusive or divisive and that's again a challenge for policymakers. It's one of these really mind-bending and stretching operations because it's not only a tax question, it's social security, it's employment law, and it's a whole series of questions. So it's a fascinating debate and the European Commission has been doing a lot of work on that. It's not directly under my responsibility but we have been doing consultations around the collaborative economy.
AH: So, we will see more of that coming in 2018?
SQ: Yes, I think so.
AH: On state aid, you're building this whole tax framework around digital companies, but at the same time you've got the Competition Commissioner challenging the biggest digital companies about their tax payments. Do you think there's a fear among businesses that you're building this framework, but at the same time you are scaring them away because of all these issues that are making them question why they should operate in the EU if the Commission is just going to take billions away from them?
SQ: I don't see it that way at all. I don't see a contradiction in this. I think that the two things are perfectly compatible. On the one hand, on the tax side what we're trying to do is to ensure that we have a fair, efficient, transparent and a balanced tax system, and that companies doing the same kind of operations are being taxed in the same kind of way and that there isn't an advantage for one or the other simply because they happen to do business on a digitalised platform rather than a physical platform. And I think it's fairly clear that it would not be desirable to have an active discrimination in that sense. On the other side, the state aid rules have been there for a long time and one of their objectives is to avoid companies being given selective advantages which give them an unfair competitive advantage compared to other players in the market doing the same thing.
So, I see there being a huge amount of compatibility between those two things: one is about putting in place the structural laws and legal framework to enable business to operate smoothly in a single market. That's where the CCCTB is so important because it provides a common consolidated corporate tax basis on which companies can operate and it's much simpler, it's more flexible and it's single market compatible. And the state aid people coming along and saying: the vast majority of what's happening here is fine, but here we see the outliers and that's what we're looking at. The outliers and the egregiously selective advantages being given is what we need to tackle and that's what the state rules are there for.
Different tools but it's fundamentally the same objective: fair and efficient taxation.
AH: Moving on, how do you think blockchain could be used in customs?
SQ: I'm aware that there are already live pilots being done at commercial level using blockchain on containers, for example. We are exploring internally in my DG the potential use cases of blockchain in tax and in customs. It's more on an experimental basis, but it's to see and understand the technology and see what the potential is. So I think there's a lot of hype around blockchain, but that doesn't mean there's not a big potential there as well and it's something that we are engaged in and we will remain engaged in.
AH: What's next on your agenda?
SQ: Well, we have gone through a very intense period in the last 2.5 years of producing new legislative proposals, both corporate taxation, anti-tax avoidance, VAT, and digital will come. By the middle of 2018 there'll be a sort of cut off because that's the latest point at which we can present new legislative proposals and get them adopted by the end of the mandate of this [European] Parliament and this Commission, which is mid-2019. So, between the middle of 2018 and 2019 we will be very much focussed on implementation and adoption of what's already been presented and then we will start a new wave of activity from the end of 2019/early 2020 onwards when we have a new mandate in the Parliament and the Commission. So we're at a point in the cycle where we're moving from proposition to adoption and implementation.
AH: And that leads me to my final question, what are your top three global tax predictions for 2018? What do you think companies and business professionals should be looking out for?
SQ: Firstly, I think there will be a US tax reform. Secondly, there will be more leaks, i.e. Paradise Papers, and that will create further momentum for fundamental reform of the international tax system. Finally, I think that as the digital tax discussion continues to mature, the case for the CCCTB as the structural solution for the corporate tax environment in Europe will be seen to be stronger and stronger.
AH: Why do you think that it will be stronger?
SQ: Because it provides a structural long-term solution. And that's what we need in a single market fit for purpose in the 21st century.
The above article was published on www.internationaltaxreview.com on January 30 2018 and has been republished with the approval of the Publisher.