On 21 March 2018 the European Commission proposed rules on taxation of digital business activities in the EU. These tax measures propose to adapt the tax laws for the digital economy.

The tax rules for digital businesses including social media companies, collaborative platforms and online content providers are not very well aligned with the activities of digital companies that are global, virtual or have little or no physical presence. Currently it is estimated that digital companies in the EU have an average effective tax rate that is half that of companies in the traditional economy.

At the moment profits made through activities such as selling user-generated data and content are not always captured by the tax rules. If EU member states look for unilateral ways to tax digital activities this will give rise to an unpredictable tax environment for digital companies and result in uncertainty for these businesses. The EU is therefore looking for a coordinated approach to make sure that the digital economy is taxed in a consistent, fair and predictable way.

Proposed reform of corporate tax rules for digital activities

This proposal would enable Member States to tax profits that are generated in their territory, even if a company does not have a physical presence there. The new rules would ensure that the tax contribution by online businesses is on a par with the tax contribution by traditional companies.

Under this proposal a digital platform would be deemed to have a taxable ‘digital presence’ or a virtual permanent establishment in an EU Member State if it exceeds a threshold of EUR 7 million in annual revenues in an EU Member State; it has more than 100,000 users in a Member State in a taxable year; or if over 3000 business contracts for digital services are created between the company and business users in a taxable year.

The new rules would ensure that profits are allocated to Member States in a way which better reflects how companies can create value online. This would be done by, for example, allocating profits depending on where the user is based at the time of consumption. The result would be to establish a real link between where digital profits are made and where they are taxed.

The measure could eventually be integrated into the scope of the Common Consolidated Corporate Tax Base (CCCTB) aims to allocate profits of multinational groups in a way which better reflects where the value is created.

Proposed interim tax on some revenue from digital activities

The European Commission is proposing an interim tax so that digital activities that are not currently being taxed would immediately start earning revenues for EU Member States. This could also help to avoid a series of unilateral measures by member states aiming to tax digital activities and leading to uncertainty and complexity for digital businesses.

The interim tax would apply to revenues arising from certain digital activities and would allow member states to collect some revenue from these activities while a more comprehensive reform is being implemented. The tax would contain inbuilt mechanisms to guard against double taxation as much as possible.

The interim tax would apply to revenues created from digital activities where users play a major role in value creation. This would include revenues created from selling online advertising space; revenues created from digital intermediary activities allowing users to interact with other users and facilitating the sale of goods and services between them; and revenues created from the sale of data generated from user-provided information.

The tax revenues would be collected by the EU Member States where the users are located. The tax would only apply to companies with total annual worldwide revenues of EUR 750 million and EU revenues of EUR 50 million. If for example a 3% rate were applied this tax would raise an estimated EUR 5 billion tax revenues a year in the EU.

Approval process

The legislative proposals will be submitted by the European Commission to the Council for adoption and to the European Parliament for consultation. The EU will continue to participate in ongoing global discussions on digital taxation within the G20 and OECD.