EU Digital Tax Proposals

March 21, 2018

Most readers will be aware in general terms of the proposals
for digital taxation which have been put forward by the EU Commission. You may
find it useful to access the various documents from the Commission that can be
found here.

Given the controversial nature of the proposals and the
hyperbole that fills almost all the supporting statements from the Commission,
it is difficult for a website like ours to reproduce the press release from the
Commission as we might normally do. The following extract from the press release,
detailing two options is the least hyperbolic elemnt:

Proposal 1: A common reform of
the EU’s corporate tax rules for digital activities

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.

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.

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

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.

the common EU reform of the underlying tax rules, this indirect tax would apply
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

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

created from the sale of data generated from user-provided information.

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%.