Digital tax explainer: Tech firms are growing far faster than EU economy at large

Every day, 20 billion emails and 150 million social media posts are written, and 650 million online searches are carried out in the European Union.

Yet on average, according to the European Commission, digitalised businesses face an effective tax rate of only 9.5 per cent, compared to 23.2 per cent for traditional business models.

Digital companies are growing far faster than the economy at large, and this trend is set to continue. In 2006, only one digital company was in the top 20 firms by market capitalisation, whereas by 2017 this had risen to nine digital companies.

Average annual revenue growth of the top digital firms is 14 per cent compared to between 0.2 per cent and 3 per cent for other multinationals. Only 50 per cent of the affiliates of digital multinationals are foreign based, compared to 80 per cent for traditional multinationals.

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The largest digital companies have huge user and consumer bases within the EU. Some 42 per cent of Europeans are users of Facebook. Although in the digital economy the majority of websites are local (accessed only from one country), the lion's share of the traffic is captured by the much smaller number of global websites.

“The Digital Single Market,” the Commission argues, “cannot reach its full potential if young and innovative companies are held back by antiquated tax rules.

“It could contribute €415 billion to the European economy, boosting jobs, growth, competition, investment and innovation. The value of the data economy in the EU will increase to €739 billion by 2020, representing 4 per cent of overall EU GDP. With digitalisation, cross-border opportunities for even the smallest companies will increase.”

An estimated €5 billion in revenues a year could be generated for member States if the Commission’s proposed interim tax on digital services is applied at a rate of 3 per cent. “This single rate, once applied throughout the EU would help to avoid “tax shopping” and distortions in the Single Market.”

Nearly three-quarters (74 per cent) of citizens want EU action to fight against tax avoidance, according to Eurobarometer polling. In a recent public consultation, three quarters of respondents agreed that current international taxation rules allow companies with digital business models to benefit from certain favourable tax regimes and push down their tax contributions. Some 82 per cent believed that something should be done.