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EU Announces New Digital Tax Plans

by Ulrika Lomas,, Brussels

22 March 2018

The European Commission on March 21 released two proposed amendments to international tax rules to ensure digital business activities are taxed "fairly" and in a growth-friendly way in the European Union.

The proposals are in response to calls from member states for a permanent and lasting solution, to ensure a "fair share" of tax revenues from online activities where digital firms derive revenue from users in their territory, which might otherwise go untaxed.

The Commission noted: "Profits made through lucrative activities, such as selling user-generated data and content, are not captured by today's tax rules. Member states are now starting to seek fast, unilateral solutions to tax digital activities, which creates a legal minefield and tax uncertainty for business. A coordinated approach is the only way to ensure that the digital economy is taxed in a fair, growth-friendly, and sustainable way."

The Commission has proposed two solutions. The first initiative – the Commission's preferred long-term solution – would 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 that would cover the main digital activities that currently escape tax altogether in the EU.

Specifically, the first 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 fulfills one of the following criteria:

  • It exceeds a threshold of EUR7m (USD8.58m) in annual revenues in a member state;
  • It has more than 100,000 users in a member state in a taxable year
  • Over 3,000 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. The Commission argues that this will better reflect how companies can create value online: for example, depending on where the user is based at the time of consumption.

The Commission said 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.

The second, temporary solution is intended to ensure there is at least a harmonized EU approach to digital taxation, in the absence of a global agreement, to deter member states from introducing unilateral measures.

The Commission has explained that its second proposal is the introduction of an indirect tax, with a three percent rate put forward by the Commission, which would apply to revenues created from certain digital activities which escape the current tax framework entirely. According to the Commission, the tax will apply to revenues created from activities where users play a major role in value creation and those that 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 apply only to companies with total annual worldwide revenues of at least EUR750m and EU revenues of EUR50m.

These legislative proposals are to be submitted to the Council for adoption and to the European Parliament for consultation.

Releasing its proposals, the EU said it remains committed to global discussions on digital taxation under the auspices of the G20 and OECD and will continue to push for ambitious international solutions to the issues posed by the digital economy.

Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, said: "Digitalization brings countless benefits and opportunities. But it also requires adjustments to our traditional rules and systems. 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."

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation, and Customs, added: "The digital economy is a major opportunity for Europe and Europe is a huge source of revenues for digital firms. But this win-win situation raises legal and fiscal concerns. 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."

On March 21, the Commission published the following related documents:

  • A Proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence;
  • An annex to the proposal;
  • An impact assessment;
  • A Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services;
  • A Commission recommendation relating to the corporate taxation of a significant digital presence; and
  • A Communication from the Commission to the European Parliament and the Council - Time to establish a modern, fair and efficient taxation standard for the digital economy.

TAGS: tax | business | European Commission | value added tax (VAT) | corporation tax | transfer pricing | G20 | European Union (EU) | services | Europe | Tax | BEPS

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