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The European Commission has announced plans to introduce a 3% tax on digital businesses, likely to hit around 150 companies and bring in some €5bn (£4.4bn) a year, as an interim step in its efforts to ensure a fair share of revenues from the current ‘black hole’ of online activities
The Commission argues existing tax rules were not designed to cater for those companies that are global, virtual or have little or no physical presence, and profits made through lucrative activities, such as selling user-generated data and content, are not captured. As a result digital companies have an average effective tax rate half that of the traditional economy in the EU.
Its proposals have two elements. The first initiative – which is described as the Commission’s preferred long-term solution – aims to reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels.
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, Commission vice-president for the euro and social dialogue said: ‘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.’
The new rules define a digital platform as having a taxable ‘digital presence’ or a virtual permanent establishment in a member state if it fulfils any one of the three criteria.
These are having more than €7m in annual revenues in a member state; having more than 100,000 users in a member state in a taxable year; or where over 3000 business contracts for digital services are created between the company and business users in a taxable year.
The proposals 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.
The Commission says the measure could eventually be integrated into the scope of the common consolidated corporate tax base (CCCTB), its long standing but troubled initiative for allocating profits of large multinational groups in a way which better reflects where the value is created.
In the meantime, an interim tax will be introduced to generate immediate revenues for member states, and as a way of heading off unilateral measures to tax digital activities by individual countries, which the Commission says could lead to a patchwork of national responses.
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, such as selling online advertising space, digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them, and 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 €750m and EU revenues of €50m, to ensure that smaller start-ups and scale-up businesses remain unburdened.
The Commission says an estimated €5bn in revenues a year could be generated for member states if the tax is applied at a rate of 3%. This single rate, once applied throughout the EU would help to avoid ‘tax shopping’, while a digital portal will be set up to help companies comply. As part of that system, one member state will be responsible for identifying the taxpayer, collecting the tax and allocating it to other member states as appropriate.
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 Commission says.
Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs said: ‘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. That’s why we’re bringing forward a new legal standard as well an interim tax for digital activities.’
Glyn Fullelove, chair of CIOT’s technical committee, said the Commission’s proposals are broader and even more likely to lead to disputes and double taxation than the measures that the UK Treasury has recently started consulting on, and expressed concern that it appears to have ruled out further work to find a multilateral solution that involves non-European countries such as the US.
‘In relation to the interim measures, at a level of 3%the levy would imply unrealistically high levels of profit attribution to the EU for many companies comparing the burden of the tax with the burden of conventional profits based taxation and thus would likely give rise to double taxation.
‘It is not clear that a turnover-based tax, particularly at rates as high as 3%, would be fully and effectively creditable against profits based taxes,’ he said.
The legislative proposals will now be submitted to the Council for adoption and to the European Parliament for consultation.
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