Toward A Neutral Corporate Tax For the Gig Economy —Rethinking The Labour Factor Of The Common Consolidated Corporate Tax Base Directive Proposal Under The EU Law
Toward A Neutral Corporate Tax For the Gig Economy – Rethinking The Labour Factor Of The Common Consolidated Corporate Tax Base Directive Proposal Under The EU Law
Shu-Chien Chen LL.M
PhD candidate at Erasmus University Rotterdam
The Background, Assumptions And The Theoretical Framework
It is now widely accepted that there is difficulty of levying corporate tax on multinational enterprises (MNEs) in the digital economy. So this is also included in the OECD’s Base Erosion and Profit Shifting (BEPS) tax reform Action Plan. MNEs such as Uber have become the targets attracting criticisms for the failure of current international tax regime. However, naming and shaming is not a good strategy to start the reform.
Tax was long assumed by many economists as a potential danger and distortion to the innovative online industries, but it is not empirically true. Pursing economic efficiency is not always at the expense of lowering labor protection; protecting employees is not always at the expense of economic efficiency. Tax is not merely deadweight loss but also measurement unit of public benefits. “Tax neutrality” should also be based on the benefit principle, not based on the “no tax world.”
Therefore, I argue for a new perspective, i.e. the reformed tax neutrality principle, for levying corporate tax on the gig economy. This reformed tax neutrality principle can be implemented through the Common Consolidated Corporate Tax Base Directive Proposal (CCCTB) under the EU law.
The Research Scope, Questions And Methodology
The research question of this paper is, how a tax neutral labor factor should be designed under the CCCTB. The sub-questions are: how should the employees be defined, and be attributed in the labour factor?
CCCTB is EU’s ambitious attempt to harmonized corporate tax base across EU, on a group taxation basis, applicable to MNE taxpayers. It is also a legal transplant from USA’ state taxation experiences. Under the CCCTB, cross-border losses from different group members can be offset. More importantly, the current bilateral tax treaties between EU Member States would cease to apply, so the taxing rights of EU Member States on MNEs’ pan-EU income will be divided according to the three-factor formula, consisting of the sales factor, the asset factor and the labor factor, all equally weighted.
According to the benefit principle, it is logical that a formula consists of factors representing both the input side and the out side of economic activities. The sales factor would represent the out put side, i.e. the market. The labor factor represents the in-put side, the capacity to mobilize the human resources, i.e. the input side. A healthy and well-functioning labor market is the public benefit represented by the labor factor of a sharing formula.
In the USA, the payroll factor has been widely adopted to represent the input from human beings. The CCCTB Directive Proposal follows the similar rationale, but with a variation: the labor factor of the CCCTB consists of two sub-factors: the payroll and the headcounts of the employees.
To seek answers of the scope and where to attribute employees, I compare the USA’s experiences to the CCCTB. In addition, I also explore the discussions regarding allocation of taxing powers of cross-border employment income in the international tax law, and the relevant discussions on the scope of ‘employee’ in the EU labor law and social security law.
The Structure and Results
The paper is structured as follows. I will introduce the difficulty of levying a fair share of tax from MNEs of the digital economy. Further I will elaborate why it is feasible and fair to adopt a three factor sharing formula, especially consisting of the labor factor, for taxing MNE taxpayers of the gig economy. I compare the payroll factor in USA’s state taxation and the labor factor under the CCCTB. I revisit the scope and the attribution of employees in the traditional international tax regime, the labor law and the social security law.
In conclusion, there are two remarks on the labor factor for the gig economy. First, the labor factor has a strong theoretical foundation. It is not a type of tax that only applicable to online MNEs. It reflects the benefits where MNEs mobilize the human resources, in the context of corporate income tax. It is misunderstanding that making use of “employees” as a proxy in the tax system, would hinder economic growth or innovation.
Second, the scope of employees should be broad enough to include typical employees as well as atypical workforce, such as independent contractors or seconded workforce. As to the attribution rule, employees should be attributed to where they are performing their function, which is often the physical location. Such design is consistent with tax neutrality, and it is more transparent than arbitrarily levying a separate “digital tax”.
To sum up, adopting a formula could create win-win for MNEs and different states, to pursue tax neutrality as true justice. A properly designed corporate tax is not the enemy of innovation. MNEs are not the cause of the international tax regime failure, but a cooperating partner to precede the international tax reform.
 See the illustration in the annex.