The European Commission launches its proposals for the taxation of the digital economy
Tax Alert 7-2018
On March 21, 2018 the European Commission announced the submission of two legislative proposals to the European Council and the Parliament, with a view to ensuring the fair taxation of digital business activities in the EU. The first proposal aims to reform national corporate taxes and tax treaties signed with third countries, with a view to defining the existence of a “taxable digital presence” or a “virtual permanent establishment”. This new nexus would permit the taxation of profits obtained through digital channels without a traditional physical presence. This is seen as the more comprehensive and optimum solution on the medium/long term. In the meantime and until the reforms have been implemented, a transitional and immediate measure is proposed, consisting of an interim tax on revenues from certain digital activities (second proposal).
The latter indirect tax aims to offer a harmonized response to similar initiatives that were already beginning to arise in certain Member States. It would be applied to gross revenues (without the deduction of expenses) obtained on the pursuit of activities in which the number of users plays a major role in value creation. For example, revenues obtained from the sale of online advertising space or from data obtained from user-provided information, would be taxed. The revenues of digital platforms providing intermediation services between users would also be taxed. Application of the tax would be limited to revenues obtained by companies or groups with a minimum global turnover of €750 million and annual EU revenues of at least €50 million. The tax rate would be the same throughout the EU and the proposal sets it at 3%. In principle, the existence of a taxable “digital presence” (permanent solution) would also depend on the existence of objective elements, such as number of customers or users and the volume of revenues and activity (business contracts for digital services).
These proposals are the EU’s reaction to the interim report published by the OECD on March 16, 2018. The report performed a broad analysis of the challenges of the digital economy and possible ways to address its taxation. Nonetheless, it reflects the absence, at least at present, of a true international consensus on the matter and sets 2020 as the year in which the agreed possible measures should begin to take effect. In its report, the OECD points out the disadvantages of taking immediate measures (taxes on certain digital activities) and advocates having such measures affect a limited number of businesses. Despite this, the EU has decided to create momentum and give precedence to the generation of immediate revenues which, in turn, entail an incentive for the application of internationally agreed provisions.