On 21 March 2018, the European Commission proposed a digital tax package on taxing the digital economy. What does this mean for your organisation?
Taxing the digital economy
Big data and digital platforms have grown exponentially over the past decade and are radically transforming every industry. The digital economy has offered new business opportunities inside and outside the European Union. The international tax framework currently offers no possibility to levy more tax from 'digital companies'. These rules were not designed to cater for those companies that are global, virtual or have little or no physical presence. The European Commission and the OECD have so far not drawn up concrete rules to achieve a taxing on digital activities. The European Commission recognises, however, the need for a new tax framework that provides an international solution to the challenges of taxing the digital economy.
Reform corporate tax rules
On 21 March, the European Commission made two separate proposals aimed at fairer taxation of digital activities in the EU. First, the European Commission proposes to reform corporate tax rules. This proposal allows Member States to tax the profits generated on their territory, even if a company is not physically present there.
These digital platforms are considered to have a taxable digital presence or virtual permanent establishment in a Member State if it meets one of the following criteria:
- the annual turnover in a Member State exceeds 7 million euros;
- the number of users who are located in that Member State during the tax period exceeds 100,000;
- the number of business contracts that are concluded during the tax period by users located in that Member State exceeds 3,000.
The new rules also change the way in which profits are allocated to member states. Taxpayers would therefore need to undertake a functional analysis for profit allocation.
Provisional tax on certain income from digital activities
The second proposal includes a provisional tax on certain income from digital activities. It contains a measure in the form of a 3 percent Digital Services Tax on revenues. A provisional tax can ensure that activities that are currently not effectively taxed will immediately generate revenue for the Member States. In addition, such a measure prevents certain Member States from taking unilateral measures. The new Digital Services Tax would apply as of January 1, 2020, and would be levied at the single rate of 3 percent on gross revenues. This concerns income:
- from the sale of online advertising space;
- from digital intermediary activities through which users can come into contact with each other or sell goods and services to each other;
- from the sale of data generated from information provided by users.
The Digital Services Tax would be collected by the Member States where the users are located, and only from companies that have at least 750 million euros annually worldwide and at least 50 million euros in revenue in the EU.
Cooperation between Member States
The European Commissions proposal also provides for cooperation between Member States in the form of a one-stop-shop mechanism, allowing taxpayers to have a single point of contact to fulfil all administrative obligations in relation to the new tax (i.e. identification, reporting, and payment). In addition, taxpayers should have the possibility to deduct the Digital Services Tax from their corporate income tax liability, so as to avoid double taxation.
Next steps
The Directives need to be formally adopted by the Council by unanimous vote, after consultation of the European Parliament and the Economic and Social Committee. There likely will be significant discussion on the proposed Directives and it remains to be seen whether they can achieve the required unanimity. Some Member States have already expressed their concerns with respect to the Digital Services Tax. The other major concern is how the United States will react to these proposals, as the European Commission estimates that around 120 to 150 companies will fall within the scope of the new rules, of which half is expected to be located in the United States and a third in the EU.
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