The European Commission today unveiled proposals for new rules it said will ensure the fair taxation of tech giants, including a three per cent tax on certain digital revenues of heavyhitters in the industry like Amazon and Facebook.
It has drawn up a double-layered plan to reform rules to tax digital firms where they make sales – regardless of where their physical presence is.
So, online firms will ultimately face contributing "at the same level" as traditional bricks and mortar companies, according to the Commission. The first part of the proposal states the need for a major reform of the EU's corporate tax rules for digital business.
Read more: Tech giants facing UK tax shake-up
Details on the proposals
A digital platform will be considered to have a taxable digital presence if it fulfils one of three criteria.
These include making over €7m (£6.1m) in annual revenues in a member state, having over 100,000 users in a member state within a taxable year, or having over 3,000 business contracts for digital services created between the firm and its business users within a year.
The second part of the proposal comes in response to calls from several member states for an "interim tax" covering the main digital activities that escape tax altogether in the EU at present.
The tax will apply to revenues such as those created from selling online advertising space and those created from the sale of data generated from user-provided information.
An estimated €5bn in revenues a year could be brought in for member states if this tax is applied at a rate of three per cent, according to the Commission. It will only apply to firms with annual worldwide revenues of €750m and EU revenues of €50m to avoid targeting smaller startups and scale-ups.
The Commission said the system will be used solely as an interim measure, until the wider reform has been implemented "and has inbuilt mechanisms to alleviate the possibility of double taxation".
Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs said:
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.
The proposals will be submitted to the European Council for adoption, and to the European Parliament for consultation.
Response to the proposals:
Plugging EU 'funding gap' left by Brexit?
Grant Thornton's head of tax, Jonathan Riley, said the proposals needed "very careful consideration", but were "a cause for concern" at two levels.
He pointed out that there has been multilateral action on measures to protect the tax bases of all countries over the past few years.
Riley said: "The UK government is continuing to consult on the future shape and impact of tax on entities that operate digitally, as does the OECD. Indeed, this week’s G20 summit in Argentina also considers this.
Suggesting a tax point based on turnover, or users or business contacts seems clumpy and would need considerable anti-avoidance measures to safeguard whatever is sought to be taxed. So the EU looks as if it is going it alone, or is perhaps frustrated at not being party to those other discussions.
Secondly, the EU has to consider how it will be funded post-Brexit. With the UK’s contributions eventually at an end, is this a means of ensuring remaining EU states receive greater tax revenue to fill gaps left by current EU funding? Is this actually about fairness? What does it say about member states sovereign tax rights?
"Unilateralism can cause unintended consequences," he added.
Will 'chill trade investment' from firms across the globe
Dean Garfield, chief executive of the US-based trade body Information Technology Industry Council, said: "We agree with the fundamental thesis of the European Commission: today’s tax systems do not reflect that today’s economy is digital. Unfortunately, the EU’s proposal would exacerbate rather than solve this problem."
By proposing a tax on digital advertising revenues and departing from established multilateral discussions in the OECD, this proposal harms business certainty in Europe and would chill trade and investment from companies across the globe.
We strongly urge the EU to reconsider its approach and are committed to working with it to address these important international tax questions in a deliberate, constructive, and multilateral way
Need to make sure the measures are 'fit for purpose'
Dominic Stuttaford, head of tax for Europe, Middle East, Asia and Brazil at law firm Norton Rose Fulbright, said:
This is likely the first in a wave of new measures around the world as authorities attempt to grapple with the 'fair taxation' of a completely new business structure that current tax systems are simply too old to deal with.
The key will be ensuring that any new measures are fit for purpose and appropriate for the myriad of business types within the broad definitions provided.