European Commission proposes 3% turnover tax for digital companies

The European Commission has proposed a directive to require digital businesses to pay tax on profits generated in states where they have a significant digital presence, even if they are not physically located there.

The commission is also seeking an “interim” digital services tax at European Union level, to be levied at 3 per cent on turnover. This would apply to services provided by digital companies where user participation and user contributions play a central role in value creation – services such as the sale of third-party goods online through sites will be targeted rather than direct sales by those sites.

Some 120-150 companies throughout the union – European, US and Asian – would be affected by the interim tax, the commission estimated. It would remain in place until a long-term solution to the challenge of taxation of digital profits was agreed at international level.

The proposals were unveiled on Wednesday by the commission, which insisted that current corporate tax models were unfit for the digital age. The tax could raise some €5 billion for member states, the commission said.

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“Companies engaged in digital activities, like all other companies, must share the tax burden needed to finance the public services on which they rely,” the commission said in its communication prior to the EU leaders’ summit that begins on Thursday.

Legal and fiscal concerns

Taxation commissioner Pierre Moscovici, highlighting the tax challenges facing the EU, said: “The digital economy is a major opportunity for Europe, and Europe is a huge source of revenues for digital firms. But this win-win situation raises legal and fiscal concerns. Our pre-internet rules do not allow our member states to tax digital companies operating in Europe when they have little or no physical presence here.

“This represents 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.”

Commenting on the commission’s proposal, Taoiseach Leo Varadkar said in the Dáil on Wednesday: “The commission has published a set of proposals today which recommends a short-term, temporary levy of 3 per cent on certain digital activities. I will be making clear my views that any such measure will be ill-judged for the reasons set out and also because it would likely disadvantage smaller member states.”

Minister for Finance Paschal Donohoe said: “I note the commission proposals published today and believe that this should to be seen in the context of the OECD report of last week.

“As usual, Ireland will work with other member states to critically assess the proposals from the commission. This is the beginning of a process that will go on for some time in parallel with the work of the OECD. It is noteworthy that the OECD report did not find consensus among countries on this issue.”

Other Irish sources were dismissive of the proposals as contradictory, “knee-jerk” and “populist” and suggested that even the commission was divided on them. They will be discussed at the EU summit on Thursday, although no decision on the proposals will be taken.

The Taoiseach is expected to argue that the measures will be seen in the US as specifically targeting US companies and come at an unfortunate time of heightened transatlantic tensions over trade.

He will have taken some comfort from his meeting on Monday with German chancellor Angela Merkel, who expressed scepticism over the commission plans and is particularly nervous of a trade war with the US.

Ireland favours waiting for proposals that will emerge shortly from the OECD, arguing that only global action on taxing the huge digital multinationals will be effective.

In a statement the American Chamber of Commerce Ireland said it was important any proposals in this area were agreed internationally through the OECD. It was “most concerned” about “the economic damage that taxes on turnover could cause,” it said. It added: “Such levies target the turnover of digitalised enterprises without a link to either profits or the value creation in the jurisdiction where they are levied.”

Principle

Central to the commission approach is the principle that profits should be taxed where value is created. “However, the current international tax rules were designed for ‘brick and mortar’ businesses. They are largely based on physical presence and were not designed to cope with business models driven primarily by intangible assets, data and knowledge,” the commission argued.

The proposals are targeted at companies with a “significant” digital presence in markets – a company would be liable if it exceeded annual revenue of €7 million in a state, had more than 100,000 users accessing its digital services in a state in a tax year, or if more than 3,000 business contracts for digital services were created between the company and business users in a taxable year.

The commission denied strongly that the measures were targeted at foreign companies, insisting that the new rules on attribution of profits covered all businesses, whether EU-based or international.

In developing these proposals, the commission said it was in close contact with the OECD, G20 and other international partners, to keep the EU and global approach as aligned as possible. “The EU proposal should feed the international debate and help push our global partners into action,” it said.