09.04.2018 European Commission digital tax plan

09.04.2018 European Commission digital tax plan

The European Commission announced plans to combat tax abuses in the digital economy – in particular, to tax companies where they actually generate business and where profits are really made, rather than where they are headquartered. As a result, some of the largest technology firms are facing hefty new bills, as the UK government moves to fundamentally change the way they are taxed.

According to the European Commission, digital companies, on average, pay an effective tax rate of 9.5%, while most companies in Europe pay a 23% corporate tax. Proposed revisions to the way of taxation of digital businesses could significantly increase the amount such companies have to pay in tax. Companies with substantial online revenues will be expected to pay a 3% tax on turnover generated from various online services such as online advertising and the sale of user data, introducing the concept of a virtual ‘permanent establishment’ so that companies become taxable in jurisdictions where they have users – even if there is no employment or tangible assets, and bringing in an estimated €5bn (£4.4bn).

The proposal would have a significant impact on companies such as Facebook and Google with global annual revenues above €750m and taxable EU revenue above €50m. These companies usually try to shift their profits to countries where the tax rate is low, like Ireland and Luxembourgh but the new tax proposal is here to stop this by allowing member states to tax profits that are generated in their territory, even if these companies do not have a physical presence there.

Pierre Moscovici, the EU’s commissioner for taxation argued that the current tax rules are outdated and said: “The digital revolution has overturned our economies and also shaken profoundly the way businesses create value today and the idea [of the new proposal] is to ensure equal treatment and fairer taxation”. Mel Stride, the Financial Secretary to the Treasury told the BBC that large digital companies should pay a “fair” amount of tax. Stride said, “at the moment [they] are generating very significant value in the UK, typically through having a digital platform with lots of users interacting with that platform. That is driving a lot of value, so you’re looking at social media platforms, online marketplaces, internet search engines – we want to move to a situation where we are taxing those activities fairly.”

Considering the fact that the relationship between the U.S. and Europe has recently suffered a setback following the introduction of the new tariffs on steel and aluminum, it may look like Europe is calling war on the U.S. but the new rules do not target U.S. firms specifically. “This is not an anti-US tax, the new rules aren’t a specific decision to target U.S. companies”, said Pierre Moscovici, “It is just about taxing properly those companies who generate value through digital activity in Europe”. “It’s not a response to this or that decision taken by the U.S. administration recently, whether it’s tax reform or trade measures,” said Moscovici.