EU proposing to ‘go it alone’, in taxing ‘digital’ services, whilst waiting for OECD/G20 multi-lateral initiatives to tax these services

On 21.3.18, the European Commission proposed new rules to tax digital business activities – ‘going it alone’, ahead of any consensus from the OECD/G20.

In response to this, the Australian Treasurer was reported as saying: ‘that Australia, like other G20 nations, might go it alone with measures to tax digital economy companies, like Uber, because efforts to agree on a multilateral process were moving too slowly. [see AFR 21.3.18 AFR article]

The EU said that these proposals come as Member States seek permanent and lasting solutions to ensure a fair share of tax revenues from online activities, as urgently called for by EU leaders in October 2017. 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.

The package has a longer term approach (Proposal 1) and an interim approach (Proposal 2).

Proposal 1 (longer term): 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:

1. –   It exceeds a threshold of €7 million in annual revenues in a Member State
2. –   It has more than 100,000 users in a Member State in a taxable year
3. –   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 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.

Ultimately, the new system secures a real link between where digital profits are made and where they are taxed.

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

As an interim measure, Member States could implement an indirect tax, which would apply to revenues created from certain digital activities which escape the current tax framework entirely. It would allow activities, that are currently not effectively taxed, to begin generating immediate revenues for Member States.

It would also help to avoid unilateral measures to tax digital activities in certain Member States which could lead to a patchwork of national responses which would be damaging for our Single Market.

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:

1. created from selling online advertising space.
2. 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.
3. 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.

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.

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.

Study questions (answers available)

1. Is the EU ‘going it alone’, to tax digital services, whilst the OECD/G20 to determine a multi-lateral approach?
2. Is Australia contemplating doing the same thing?
3. Is the longer term proposal, a direct tax, based on a deemed (digital) permanent establishment, and the interim proposal, an indirect tax?
4. Is there a much lower turnover threshold, proposed for the direct tax (€7 million), compared with the indirect tax (€750 million)?
5. Are the proposed alternative thresholds, for the direct tax, 1,000,000 users or 30,000 contracts?
6. Is the high turnover threshold, for the indirect tax, designed to avoid hurting ‘start ups’ and ‘scale up’ businesses?
7. Is the estimated additional revenues, of €5 billion a year, on the assumption that the indirect tax rate would be 5%?
8. Is the average tax rate paid by digital businesses only 10% of that paid by other businesses?