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EU plans new tax for large digital companies up to 5% of gross revenues

On 21 March 2018, the European Commission will in all likelihood present its proposals to tax large digital companies based on where their users are located rather than where they are headquartered. Although the draft proposals have not yet been officially published by the Commission, and are therefore subject to change before the scheduled publication date, it is important for digital companies to take note of the intentions of the Commission.

15 March 2018

Background

According to the European Commission, the ideal solution to the taxation of digital economy is based on where their users are located rather than where they are headquartered. This would be a global approach, which would then be translated into the tax treaties between countries, as called for by the OECD. However, this reform of corporate tax rules takes time. In order to avoid the adoption of unilateral measures by Member States, the Commission finds it necessary to act and to propose a harmonized approach, even though it is foreseen as an interim measure.

Scope

The new digital tax includes revenues derived from the following digital activities:

  • Services supplied for consideration consisting in the valorisation of user data, by means of making available advertisement space, or the sale of such user data; and
  • Services supplied for consideration consisting in the making available of digital platforms/marketplaces to users (i.e. "intermediation services"), and where such users supply goods and/or services directly between themselves.

On this basis, services consisting in the making available of digital content/solutions to users would not be in the scope of tax. This category would potentially cover any electronically supplied service other than those referred to above; e.g. activities such as electronically supplied media, streaming, online gaming, IT solutions, cloud computing services etc.

The draft document indicates that a tax rate of 1-5% on the gross revenues would apply where two cumulative conditions are met: global revenues exceed €750 million and EU digital sales exceed €10-20 million.

One-Stop-Shop

In order to minimise compliance burdens, a simplification mechanism based on the One-Stop-Shop model for the declaration and collection of the tax at EU level is proposed. The new tax paid by a business in any Member State would be deductible as a cost from the corporate income tax base in order to alleviate potential double taxation and irrespective of whether both taxes are paid in the same Member State or in different ones.

A new indirect tax?

It should be emphasized that this new digital tax does not share the characteristics of a turnover tax. The digital tax would not be levied on each transaction but would be levied on gross revenue resulting from the exploitation of digital activities characterised by user value creation. Besides, there would be no deduction of tax paid in previous stages of the production process. Furthermore, the new tax would be charged annually.

Longer term

A standalone directive on digital permanent establishment and profit allocation rules is proposed which would be included in the Common Consolidated Corporate Tax Base (“CCCTB”) negotiations.

There is likely to be a recommendation to Member States to implement digital permanent establishment and profit allocation rules in their double tax treaties with non-EU Member States (as the directive would only apply to intra-EU situations and situations with third countries when there is no applicable double tax treaty).

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