Digital Taxation: European Commission proposes new measures to ensure that all companies pay fair tax in the EU
The European Commission proposed yesterday, March 22, new rules to ensure that digital business activities are taxed in a fair and growth-friendly way in the EU. The measures would make the EU a global leader in designing tax laws fit for the modern economy and the digital age.
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.
The change has been dramatic: 9 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.
Two distinct legislative proposals proposed by the Commission today will lead to a fairer 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.
This package sets out a coherent EU approach to a digital taxation system which supports the Digital Single Market and which will feed into international discussions aiming to fix the issue at the global level.
Reform of the EU’s corporate tax rules
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.
An interim tax on certain revenue
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%.
The legislative proposals will be submitted to the Council for adoption and to the European Parliament for consultation. 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.