Pierre Moscovici – Photo EC
(BRUSSELS) – New rules to tax tech giants such as Facebook and Amazon in a ‘fair and growth-friendly way’ would make the EU a global leader in designing tax laws for the digital economy, says the EU Commission.
Current tax rules have not kept up with the recent boom in digital businesses – social media companies, collaborative platforms and online content providers 0 says the EU executive. With 9 of the world’s top 20 companies by market capitalisation now digital – compared to 1 in 20 ten years ago – unless digital companies contribute a ‘fair share’ of tax, the Commission says the public revenues of EU Member States is under threat. Digital companies currently have an average effective tax rate half that of the traditional economy in the EU.
presenting the proposals, Financial Affairs Commissioner Pierre Moscovici acknowledged the opportunities and revenues that the digital economy had brought, but added that pre-Internet rules did not allow EU Member States to tax digital companies operating in Europe when they had little or no physical presence there: “This represents an ever-bigger black hole for Member States, because the tax base is being eroded. That’s why we’re bringing forward a new legal standard as well an interim tax for digital activities,” he said.
The Commission is putting forward two distinct legislative proposals for taxation of digital activities in the EU:
- 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 forms the Commission’s preferred long-term solution.
- 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.
Proposal 1: A common reform of the EU’s corporate tax rules for digital activities
This 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 ‘brick-and-mortar’ companies.
A digital platform 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 7 million in annual revenues in a Member State
- It has more than 100,000 users in a Member State in a taxable year
- Over 3000 business contracts for digital services are created between the company and business users in a taxable year.
The new rules will also change how profits are allocated to Member States in a way which better reflects how companies can create value online: for example, depending on where the user is based at the time of consumption.
Ultimately, the new system secures a real link between where digital profits are made and where they are taxed. The measure could eventually be integrated into the scope of the Common Consolidated Corporate Tax Base (CCCTB) the Commission’s already proposed initiative for allocating profits of large multinational groups in a way which better reflects where the value is created.
Proposal 2: An interim tax on certain revenue from digital activities
This interim tax ensures that those activities which are currently not effectively taxed would begin to generate immediate revenues for Member States. It would also help to avoid unilateral measures to tax digital activities in certain Member States which could lead to a patchwork of national responses which would be damaging for our Single Market.
Unlike the common EU reform of the underlying tax rules, this indirect tax would apply to revenues created from certain digital activities which escape the current tax framework entirely. This system will apply only as an interim measure, until the comprehensive reform has been implemented and has inbuilt mechanisms to alleviate the possibility of double taxation.
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.
The Commission says 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 750 million and EU revenues of 50 million. This will help to ensure that smaller start-ups and scale-up businesses remain unburdened. An estimated 5 billion in revenues a year could be generated for Member States if the tax is applied at a rate of 3%.
The legislative proposals are now to be submitted to the EU Council for adoption and to the European Parliament for consultation. The Commission says the EU will also continue to actively contribute to the global discussions on digital taxation within the G20/OECD, and push for ambitious international solutions.
Tax System for EU Digital Single Market - background guide
