The European Commission published a Proposal for new rules to ensure that digital business activities are taxed in a fair and growth-friendly way in the EU. Primarily the proposal targets social media platforms such as Facebook, LinkedIn and to a certain extent Google. Taxation regimes still fail to capture business models that can make profit from digital services in a country without being physically present and the mismatch that results between where value is created and where taxes are paid.
A practical example that illustrates this situation happens every time users share their preferences towards a brand, product or service, by liking a page on a social media channel or other expressions, which are then converted into data and monetised through hyper-targeted advertising.
Proposal 1: A common reform of the EU's corporate tax rules for digital activities
Through this proposal, which is the Commission’s long term preferred solution, Member States will be able to tax profits that are generated in their territory, even if a company does not have a physical presence there, thereby ensuring that online businesses are subject to taxes in a similar way to the traditional 'brick-and-mortar' companies, based on their “interactions” with users in that particular territory.
A digital platform will be deemed to have a taxable 'digital presence' or a virtual permanent establishment in a Member State if it fulfils any one of the following criteria:
- It exceeds a threshold of €7 million in annual revenues in a Member State; or
- It has more than 100,000 users in a Member State in a taxable year; or
- Over 3000 business contracts for digital services are created between the company and business users in a taxable year.
It is being proposed that the way how profits are allocated to Member States changes in a way which better reflects how companies can create value online: for example, depending on where the user is based at the time of consumption.
The measure could eventually be integrated into the scope of the Common Consolidated Corporate Tax Base (CCCTB) which already provides for a formula allocating tax revenues between the countries involved based on revenue, assets, head count and employee costs.
Proposal 2: An interim tax on certain revenue from digital activities
This interim measure, proposes the introduction of a tax, suggested at 3%, which would in the Commission’s opinion ensure that those activities which are currently not effectively taxed would begin to generate immediate revenues for Member States. The tax will apply to revenues created from activities where users play a major role in value creation and which are the hardest to capture with current tax rules, such as those revenues:
- created from selling online advertising space
- created from digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them
- created from the sale of data generated from user-provided information.
Tax revenues would be collected by the Member States where the users are located, but would apply only to companies with total annual worldwide revenues of €750 million and EU revenues of €50 million. This will help to ensure that smaller start-ups and scale-up businesses remain unburdened.
For any further queries you may have on these new proposals please get in touch with our Tax Partner Josef Mercieca.