EU Commission Releases New Measures On Digital Economy Taxation

; posted on
March 21st, 2018

The European Commission has proposed new rules to ensure that digital business activities are taxed in a fair and growth-friendly way in the EU. The first initiative aims to reform corporate tax rules to capture user created value and 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. The Commission is aware of the fact that user-generated data and content plays a key role in the making of huge profits which are not captured by current tax rules. Unilateral solutions by Member States creates a legal minefield and tax uncertainty for business, thus a coordinated approach is imperative to support the Digital Single Market.

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. 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. 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. 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%.

Next Steps

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. “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,” according to Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs.

Source: EU Commission

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