The European Commission has today launched a new proposal to adapt the taxation system of the digital economy, in which value is created in countries where a business does not have a physical presence. The EC proposes to introduce a taxable “digital presence”, fulfilling one of three criteria (at least €7m turnover per year in an EU country; more than 100,000 users in a member state in a year; or more than 3,000 business contracts in a state in a year). It also proposes an “interim tax”, which will apply to revenues created from online advertising.
The idea of a digital tax has been a long time coming, and, while it might not be welcomed by big tech companies, it is hardly a surprise. So much so, that some of them were already changing the way they book their income to pay taxes where they make their profit (for example, Facebook started doing it for some countries in 2016).
Today’s proposal of the EC will nonetheless face significant obstacles. Despite many member states’ appetite for a taxation system which allowed them to get more out of big tech, some countries with a lower corporate tax rate will no doubt try to amend it. Other stakeholders are also concerned: EU E-commerce businesses have already warned about a revenue-based tax for digital platforms, which would turn into an export tax for EU SMEs.
The EC is launching this proposal at a time when the OECD has come up with a comprehensive report on the same topic, which points to the risks of economic distortion and higher costs for business. The Commission is trying to act quickly (more quickly than the OECD itself), which is aiming to have an agreement in place by 2020. However, given the wide disagreements, it might end up being a fruitless effort – even the interim tax will have to be agreed upon by member states, which will take time.
Commissioner Moscovici also stressed that the interim tax is not against “GAFA” (i.e. Google, Apple, Facebook, Amazon) or against US firms; however, those companies are likely to be the ones most affected. While on the one hand this strengthens American concerns about tax; on the other it shows the underlying problem of European firms still struggling to compete with the world’s online giants.
