The European Commission presented a legislative package on 21 March 2018 concerning the fair taxation of digital business activities. The proposed legislative package consists of two proposals for Directives and a Recommendation to the Member States to adapt double taxation conventions with third countries.
Proposals for Directives
The aim of the EU Commission’s proposed Directives is to close a tax gap, as the average effective tax rate of digital companies is far below that of traditional companies (currently 9.5% compared to 23.2% for traditional companies).
The proposal for a Directive on corporate taxation of a significant digital presence, that is, a cross-border digital enterprise with no physical presence, aims to reform corporate tax rules so that profits are taxed where significant interactions between businesses and users take place via digital channels.
The basis for taxation is determined by whether the business activities consist wholly or partly of the supply of digital services via a digital interface and one or more of the following criteria are met:
- Revenues from the provision of digital services to users exceed €7 million in a Member State.
- The number of users in a Member State of a digital service exceeds 100,000 in a taxable year.
- The number of business contracts for a digital service exceeds 3,000.
The aim of the Commission’s proposal for a digital tax on revenues from the provision of certain digital services is to provide an interim tax solution until the implementation of a comprehensive reform, aimed at ensuring direct revenue for Member States from activities that are currently not effectively taxed.
The tax will apply to revenues from the provision of certain digital services:
- Revenues from selling online advertising space.
- Revenues from digital intermediary activities which allow users to interact with one another and which facilitate the sale of goods and services between them.
- Revenues from the sale of data generated from information provided by users.
It does not cover revenues generated by the user's own transactions using multi-sided digital interfaces.
Taxes will be collected from entities whose reported global income for the last completed financial year exceeded € 750 million and who generated taxable revenues of more than € 50 million within the EU in the same year. Smaller companies and start-ups would therefore not be affected by this Regulation.
Adapting double tax conventions
In its Recommendation, the EU Commission proposes that Member States adapt double taxation agreements with third countries in order to include taxation of a ‘significant digital presence’ and the corresponding rules on the allocation of profits.
On 19 October 2017, the European Council highlighted the need for a fair and efficient tax system for the digital economy and called on the Commission to submit proposals by the beginning of 2018. Prior to this, several Member States, including Germany, had signed a political statement calling for effective solutions compatible with EU law, based on the concept of establishing an ‘equalisation tax’ on the turnover generated in Europe by digital companies.
The legislative proposals will now be submitted to the Council for adoption and to the European Parliament for consultation.
Click here for the Commission’s press release.