The European Commission has proposed new rules to ensure that digital business activities are taxed in a “fair and growth-friendly way in the EU”. The move follows a vote in the European Parliament last week [http://www.iteuropa.com/news/european-parliament-votes-make-technology-c... which saw calls for the likes of Facebook, Google, Apple and Amazon to pay more tax in countries where they make their profits.
Before the European Parliament vote, there had already been reports that the European Commission was about to act with a “tech tax”, and today's announcement is a move in that direction. Up to now, large technology companies have declared profits generated from sales across Europe in lower tax countries likes Ireland and Luxembourg.
“The recent boom in digital businesses, such as social media companies, collaborative platforms and online content providers, has made a great contribution to economic growth in the EU. But current tax rules were not designed to cater for those companies that are global, virtual or have little or no physical presence,” said the European Commission.
It pointed out that nine of the world's top 20 companies by market capitalisation are now digital, compared to 1 in 20 ten years ago. “The challenge is to make the most of this trend, while ensuring that digital companies also contribute their fair share of tax.
“If not, there is a real risk to member state public revenues - digital companies currently have an average effective tax rate half that of the traditional economy in the EU,” the Commission said.
Two legislative proposals are being proposed by the Commission. The first initiative aims to reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels. This is the Commission's preferred “remedy”.
The second proposal responds to calls from several member states for an interim tax which covers the main digital activities that currently escape tax altogether in the EU.
Valdis Dombrovskis, vice-president for the Euro and Social Dialogue, said: "Digitalisation brings countless benefits and opportunities. But it also requires adjustments to our traditional rules and systems. We would prefer rules agreed at the global level, including at the OECD.
“But the amount of profits currently going untaxed is unacceptable. We need to urgently bring our tax rules into the 21st century by putting in place a new comprehensive and future-proof solution."
Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs, added: “The digital economy is a major opportunity for Europe and Europe is a huge source of revenues for digital firms. But this win-win situation raises legal and fiscal concerns.
“Our pre-internet rules do not allow our member states to tax digital companies operating in Europe when they have little or no physical presence here. This represents an ever-bigger black hole for member states, because the tax base is being eroded.”
The first, preferred proposal would enable member states to tax profits that are generated in their territory, even if a company does not have a physical presence there. The new rules would ensure that online businesses contribute to public finances at the same level as traditional “bricks-and-mortar” companies.
A digital company will be deemed to have a taxable “digital presence” or a virtual permanent establishment in a member state if it fulfils one of the following criteria:
- It exceeds a threshold of €7m in annual revenues in a member state
- It has more than 100,000 users in a member state in a taxable year
- Over 3,000 business contracts for digital services are created between the company and business users in a taxable year
Under proposal two, an interim tax would ensures that activities which are currently not effectively taxed would begin to generate immediate revenues for member states. The tax will apply to revenues created from activities where users play a major role in “value creation” and which are the hardest to capture with current tax rules, such as those revenues:
- created from selling online advertising space
- created from digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them
- created from the sale of data generated from user-provided information.
This proposal would clearly cover the likes of Facebook, for instance. Tax revenues would be collected by the member states where the users are located, and will only apply to companies with total annual worldwide revenues of €750m and EU revenues of €50m. “This will help to ensure that smaller start-ups and scale-up businesses remain unburdened,” said the Commission.
An estimated €5bn in revenues a year could be generated for member states if the tax is applied at a rate of 3%, said the Commission. The proposals will now be submitted to the European Council to be discussed by European leaders.