In the European Union, until now, taxation was based on the physical location of a business and the physical products that business products. However, with the rapid growth of the Digital Economy, the physical presence of companies is quickly becoming less important, making the current tax regulations obsolete. Digital companies pay, on average, half the effective tax rate of traditional business with physical locations, clearly creating a large gap that the European Union is determined to fix through its new modernized taxation plan.
Common EU Solution for Digital Activities
On 15 March 2018, the European Parliament already supported a new set of rules for taxation called the Common Consolidated Corporate Tax Base (CCCTB) and Common Corporate Tax Base (CCTB). This was based on an earlier proposal by the Commission.
Combined with the Commission’s fresh proposals (“March 21 proposals”), these new sets of rules are intended to ensure that all businesses, both digital and traditional, will be fairly taxed in a growth-friendly manner as well as guaranteeing that online businesses will contribute to public finances in a manner equal to their traditional brick-and-mortar company counterparts. The March 21 proposals focus specifically on two qualifiers - where to tax and what to tax - and how to better allocate the profits to Member States in a way that reflects value created.
Where to tax
According to the still-to-be-adopted rules, all companies will have to pay a tax in every Member State in which they have a significant digital presence. This enables Member States to tax profits generated in their territory, independent of physical presence. Significant digital presence is to be defined by one of three thresholds: revenues from supplying digital services exceeding €7 million, number of users exceeding 100,000 in a taxable year, and number of online business contracts exceeding 3,000 in a taxable year.
What to tax
The new set of rules also outlines what attributions of profit will be taken into account when calculating market value to be taxed. The three identified sources of taxable profits are: user data such as placement of advertising, services connecting users such as online marketplaces and platforms for sharing economy, and other digital services such as subscriptions to streaming services.
Interim Tax
Before the newly proposed set of rules concerning where and what to tax are fully defined and implemented, the Commission proposed an Interim Tax in order to cover the most urgent losses occurring due to the digital giants. A tax of 3% on revenues from the three main types of services - online placement of advertising, sales of collected user data, and digital platforms that facilitate interactions between users - will be placed on companies with total annual worldwide is above 750 M€ or with total annual revenue from digital activities in the EU above 50 M€.
The proposal now has to be debated in the Council, where Member States need to reach a unanimity before the proposals become law.
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