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Digital Business Lawyer

EC presents proposals for taxing digital business activities

The European Commission (‘EC’) published on 21 March 2018 two distinct legislative proposals aimed at reforming the taxation of digital business activities in the EU. The first proposal, indicated as a preferred long-term solution by the EC, would reform corporate tax rules so that businesses pay tax on their profits where they have significant interaction with users via digital channels, while the second proposal represents an interim tax to cover digital activities not currently taxed in the EU, for instance the selling of user-generated data.

Under the first proposal Member States would be able to tax companies generating profits even if the company lacks a physical presence in their territory: if the digital platform exceeds a threshold of €7 million in annual revenues in their Member State, or has over 100,000 users in that Member State in a taxable year, or creates over 3,000 business contracts for digital services between the company and business users in a taxable year, then it will be considered to have a ‘digital presence’ or virtual permanent establishment in that Member State and thus be eligible to be taxed on its profits there.

Meanwhile the interim turnover tax, set at 3%, would apply to revenues created from certain digital activities carried out by companies with total annual worldwide revenues of €750 million and EU revenues of €50 million. The main three types of revenues in scope are those created via the sale of data generated from user-provided information, revenues from selling online advertising space, and from digital platforms that facilitate interactions between users. “The political pressures to ‘do something’ are clearly making it very hard to resist interim solutions, despite the clear preference from the OECD to have a more radical update of the international rules,” comments Heather Self, Partner at Blick Rothenberg. “Unfortunately, temporary solutions are often long-lasting - remember that UK income tax was introduced as a temporary measure in 1799! The interim proposal is looking increasingly likely, and will be hideously complex to administer, despite the optimistic tone of the EU’s documents. How, in practice, will service providers measure which revenues are generated in which location?”

Wilbur Ross, the US Commerce Secretary, has reportedly told an Irish delegation to Washington, DC that the Trump Administration views the digital tax proposals as an attack on US corporations; those affected most significantly will likely be Google, Amazon, Apple and Facebook. “The long term solution needs US agreement to make it workable, because the US’ tax treaties with the EU would need to be updated, so the US can just refuse to cooperate,” notes Self.

The EC in its press release notes that in the absence of EU-wide solutions, Member States are forging ahead on a unilateral basis to tackle the taxation of digital activities, triggering fears of a patchwork of varying tax laws across the EU. “The EU is clearly trying to hold Member States to a common solution, but the problem with the proposals is that both require unanimity in order to pass a Directive,” adds Self. “There is a real risk that some Member States will push ahead with unilateral action - but the new digital services tax is a turnover tax, and any unilateral attempt is likely to breach the requirement that Member States cannot introduce any turnover tax in addition to VAT.”

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