EC proposals for digital taxation

Fri 23 Mar 2018

Following the European Parliament’s approval of tax measures taking account of digital business activity, the EC has released its proposals today for taxing digital business with the stated aim of ensuring that those businesses pay their ‘fair share of tax’.  The paper notes that, without these measures there is a real risk to Member States revenues, with digital companies typically having an effective rate of tax which is half that of the ‘traditional’ economy (i.e. that which is physically based) in the EU.

The proposals carry with them a sense of urgency for coordinated action, noting that a number of Member States are already seeking to introduce fast, unilateral solutions to tax digital activities. This could be damaging as it creates uncertainty for business and a legal minefield. The UK is one such jurisdiction, having released proposals recently at the Spring Statement.

The main tax measures proposed in the press release are:

1. Reform of the corporate tax rules by taxing digital profits in a member state where one of three thresholds is met.  These are:

• 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 objective of these proposals is to ensure profits would be taxable without the requirement for physical presence. Instead, such companies would have a ‘virtual permanent establishment. The method of taxation will incorporate factors based on digital business (for example advertising, services connecting users, and other digital services such as streaming), probably eventually through the common consolidated corporate tax base (CCCTB), which deals with the allocation of profits of large multinationals in line with where value is created.

2. An interim solution of a revenue tax to generate revenue immediately – and avoid a series of unilateral measures being taken forward by individual Member States.  It will apply to revenues created from:

• 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
• 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.  An estimated €5 billion in revenues a year could be generated for Member States if the tax is applied at a rate of 3%.
• There is further detail in a memo including a recommendation for Member States to amend their tax treaties to “change the definition of a ‘permanent establishment’ to take into account situations where a company has a significant digital presence in given country/jurisdiction.”

These proposals will be submitted to the European Parliament for consultation and the EU will also take an active role in taxing the digital economy with the G20/OECD.

There is also a useful summary.  To discuss tax developments affecting digital business operations, please get in touch with a member of the Mazars international tax team.