EU Digital Tax Proposals

The EU Commission has published its proposals for new digital taxation of large tech companies

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

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.

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%.

 


Published: 2018-03-21T21:20:00

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