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Priced at $16,000 per coin, three Bitcoins are now worth more than the Netherlands GDP per capita of $45,294 (2016), one of richest nations in the world. But Bitcoin’s current price which increased sixteen-fold this past year-- pales in comparison to the price of one tulip bulb at the height of the Dutch Tulip mania that sold for more than ten times the annual income of a skilled craftsworker.
The tulip mania began in 1593 when tulips were brought from Turkey and introduced to the Dutch who fell rapturously in love with them. These brightly colored flowers were so highly sought after that its bulb prices increased twenty-fold in one month. By 1634, tulip bulbs were widely traded by speculators on stock and futures exchanges of numerous Dutch towns and cities, until its price collapsed and panic selling began on Feb. 3, 1637. This put an end to the speculative pricing of tulip bulbs but did not stop the Dutch from trading them across the world to this day.
Whether based on speculative fervor or not, the increased demand for Bitcoin that is continuously pushing its price up is wrecking Bitcoin’s Blockchain based trading infrastructure. Virtual currency exchanges scattered all across the world-wide-web are shutting down, turning away customers, and unconfirmed virtual currency transactions bouncing off satellites, waiting to beam back down to the web in another part of the world are skyrocketing.
New international tax rules needed to tax the digital economy
The pragmatic European Union (EU) which has a long history and experience with global commerce, clearly sees that (1) virtual currencies will continue to gain legal legitimacy, (2) world’s largest satellite companies which are headquartered in the EU will continue to increase world-wide-web-connectivity, (3) to enable Blockchain technology to be embraced and implemented all across the world, and therefore (4) the EU’s economic and financial affairs council (ECOFIN) needs to implement a globally coordinated international tax policy for the EU Member States to tax the profits of the new digital economy.
The EU which has already exempted virtual currencies like Bitcoin from value-added tax (VAT), on Dec. 5, 2017 via ECOFIN adopted conclusions on the international taxation of profits of the digital economy, with the objective to outline a common EU position in discussions at the global level.
Call for global action
In formulating an appropriate proposal, the ECOFIN calls for close cooperation with the Organisation for Economic Co-operation and Development (OECD) and other international partners.
The ECOFIN, parallel to OECD’s the Base Erosion and Profit Shifting (BEPS) Reform Agenda that was implemented in response to OECD’s paper on shadow banking system, emphasizes the urgency of (1) upgrading the global network of double tax conventions (BEPS 6), (2) agreeing on a policy by developing a “virtual permanent establishment” concept (BEPS 7), (3) in conjunction with any necessary corresponding amendments to the rules of transfer pricing (BEPS 8-10).
In formulating a global digital tax nexus policy, the ECOFIN proposes taking into account various elements of nexus-- revenue based, user-base and digital factors.
The OECD is currently analyzing business models of the digital economy (BEPS 1). It is preparing an interim report to the G20, scheduled for April 2018.
Action at EU level
The ECOFIN observes that the speed at which the economy is digitalizing and the absence of international consensus on the modernization of the rules of distribution of taxing rights gives rise to unilateral actions. This leads to an increase of double taxation disputes between Member States, which undermines EU’s Internal Market. And creates more work for EU’s Anti-Competition Commission that monitors harmful tax practices within the EU.
The power to levy taxes is central to the sovereignty of EU Member States, which have assigned only limited competences to the EU in this area.The ECOFIN points out to the urgency to agree on a EU level tax policy response to the direct taxation challenges of the digital economy by embracing the BEPS standards.
The ECOFIN confirms that companies operating in the EU should pay taxes where the value is created and profit is generated since the digitalization, acting as a facilitator and accelerator of cross-border trade through advanced technological solutions including Blockchain has lead in certain situations to a misalignment between the place where profits are taxable and that where value is created.
The ECOFIN proposes the EU to adopt the principle of tax neutrality according to which tax policy choices and tax rules should foresee similar treatment for comparable situations in Member States. And encourages the reporting of the relevant information by the digital platforms and marketplaces to appropriate tax authorities, as well as the exchange of this information between jurisdictions in accordance with existing international tax laws.
The ECOFIN proposes adding a temporary equalization levy based on revenues from digital activities in the EU that would remain outside the scope of double tax conventions concluded by Member States. As this approach would be compatible with EU’s action plan aimed at coordinating a EU-wide response to corporate tax avoidance, following global standards developed by the OECD.
The ECOFIN while stressing its preference for a global solution intends to issue appropriate EU wide international tax proposals for the digital economy by early 2018.