The European Union (EU) proposed a tax on digital services in the draft package for “Fair and Effective Taxation of the Digital Economy”, which it released on March 21, 2018.
According to the European Commission, top digital companies pay an average tax rate of only 9.5% in EU, which is less than the 23.3% paid by traditional companies. The aim of the proposal is to tax the business in the member state in which value is created, even though the business has little or no physical presence in that state.
EU proposed two legislative proposals –
- The first proposal is to tax a company if it has “significant digital presence” in a member state, even though it has no physical presence.
A company will be considered to have “significant digital presence” if it meets one of the following criteria –
- Revenues from supplying digital services exceeding 7 million Euro
- Number of users exceeding 100,000
- Number of online contracts exceeding 3,000
- The second proposal is for digital tax, which is an interim 3% tax on revenue generated from the following digital activities –
- Selling online advertising space
- Selling data generated from user provided information
- Digital platforms that facilitate interactions between users
This tax will apply to companies that have annual worldwide revenue of 750 million Euros and total annual revenue from digital activities of 50 million Euros.1
Tech giants like Facebook, Google, Amazon, Uber, Airbnb and Ebay are some of the companies who will be impacted by these proposals. If the proposals become law, it may give rise to double taxation issues as a foreign tax credit is allowed on taxes paid on net income but not gross revenue in the US. In addition, a lot of emphasis is given on the value created and not on the software that created the value.
Immense pressure for the digital tax is coming from countries like France and Germany, as they feel small and medium businesses pay more tax than large digital companies. A unanimous vote by all 28 EU member states is required to pass these proposals into law. Ireland, Netherlands and Luxembourg are some of the member states resisting the proposals.
In response to the EU proposals, US Treasury Secretary Steve Mnuchin said that the US “firmly opposes proposals by any country to single out digital companies. Some of these companies are among the greatest contributors to US job creation and economic growth.”2