UK and International Tax news

EC Proposes New Rules To Tax Digital Businesses

Wednesday 28th March 2018

The European Commission has proposed new rules to apply to digital business activities including social media companies, collaborative platforms and online content providers.

Two distinct legislative proposals have been proposed by the EC:

  • The first preferred long term initiative aims to reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels.
  • The second proposal responds to calls from several member states for an interim digital sales tax to cover digital activities that currently escape tax altogether in the EU.

The preferred initiative would enable member states to tax profits that are generated in their territory, even if a company does not have a physical presence there. A digital platform will be deemed to have a taxable ‘digital presence’ or a virtual permanent establishment in a member state if it fulfils one of the following criteria:

–   it exceeds a threshold of €7 million in annual revenues in a member state,

–   it has more than 100,000 users in a member state in a taxable year, or

–   over 3,000 business contracts for digital services are created between the company and business users in a taxable year.

The new rules will also change how profits are allocated to member states 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.

Ultimately, the new system proposes to secure 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 which the EC has already proposed for allocating profits of large multinational groups in the EU.

Unlike the common EU reform of the underlying tax rules, the proposed indirect tax would apply to revenues created from certain digital activities which escape the current tax framework entirely. This system will apply only as an interim measure, until the comprehensive reform has been implemented and has inbuilt mechanisms to alleviate the possibility of double taxation.

The digital sales 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, or 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 and will only apply to companies with total annual worldwide revenues of €750m and EU revenues of €50m. This should ensure that smaller start-ups and scale-up businesses remain unburdened. The EC estimates €5 billion in revenues a year could be generated for member states if the tax is applied at a rate of 3%.

The legislative proposals will be submitted to the Council for adoption and to the European Parliament for consultation. The EU will also continue to actively contribute to the global discussions on digital taxation within the G20/OECD and push for ambitious international solutions.

If you would like more details on the above proposals, please contact Keith Rushen on 0207 486 2378.

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