New EU measures on digital taxation frighten US companies

New EU measures on digital taxation frighten US companies
Commissioner Pierre Moscovici

The European Commission proposed yesterday new rules to ensure that digital business activities are taxed in a fair and growth-friendly way in the EU. The measures would make the EU a global leader in designing tax laws fit the modern economy and the digital age. The proposals aim at taxing digital media companies on the basis of where they generate their revenues, and not where they have their regional headquarters in Europe. Currently companies such as Google and Amazon benefit from low taxation in Ireland and Luxembourg and have been fined by the Commission for tax evasion.

The Commission explains that current tax rules were not designed to cater to those companies that are global, virtual or have little or no physical presence. The change has been dramatic: 9 of the world's top 20 companies by market capitalisation are now digital, compared to 1 in 20 ten years ago.

Pierre Moscovici, commissioner in charge of taxation, commented that the pre-Internet tax rules represent 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 first 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. The new rules would ensure that online businesses contribute to public finances at the same level as conventional companies.

The taxation will apply to companies with a “digital presence” in a member state if it fulfils one of three criteria: it exceeds a threshold of €7 million in annual revenues in the member state;  has more than 100,000 users in a taxable year; has over 3,000 business contracts for digital services are created between the company and business users in a taxable year.

The second proposal is an interim tax that ensures that those activities which are currently not effectively taxed would begin to generate immediate revenues for Member States. It will be in force until a comprehensive reform has been implemented.

The tax will apply to revenues created from activities where users play a major role in value creation and that are the hardest to capture with current tax rules, such as revenues created from selling online advertising space or 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%.

According to a report by OECD last week about 110 countries have agreed to review the international tax system. But US Treasury Secretary, Steven Mnuchin, thinks that having gross taxes on internet companies is not fair. The EU proposals are expected to hit Silicon Valley companies, and the US might respond with retaliatory measures.

The Brussels Times

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