EU reveals a digital tax plan that could penalize Google, Amazon and Facebook
The European Commission — the executive arm of the European Union (EU) — unveiled plans Wednesday to tax companies where they actually generate business, rather than where they are headquartered.
The proposed changes to how digital businesses are taxed could substantially increase the amount such firms have to pay in taxes.
According to data from the European Commission, digital companies pay on average an effective tax rate of 9.5 percent — compared to 23.2 percent for traditional businesses.
“The digital revolution has overturned our economies and also shaken profoundly the way businesses create value today,” Pierre Moscovici, the EU’s commissioner for taxation said at a press conference on Wednesday, arguing that the current rules are outdated.
“The idea is to ensure equal treatment and fairer taxation,” he said.
European efforts to force big companies to pay the correct amount of taxes are not new. Amazon, for example, which is headquartered in Luxembourg but operates across different European countries, was found to benefit from special tax arrangements. Last year, the European Commission ordered Luxembourg to recover 250 million euros ($306.98 million) in “illegal” tax benefits from Amazon.
The company was recording all European sales in Luxembourg and paying a smaller tax rate there, although it later changed this structure in 2015 to pay taxes in five different EU nations. But according to the new proposed rules, companies like Amazon would be forced to record EU sales in each member country in operates in.
A digital firm will be taxed where it fulfills one of the following criteria: its annual revenues in a European country exceeds a 7 million euro ($8.6 million) threshold; it has more than 100,000 users 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 plans from the European Commission also include an interim tax measure which aims to stop countries taking unilateral actions, creating distortions in the European market, until the long-term solution is applied. This temporary measure would tax revenues from selling online advertising space; from digital intermediary activities which allow users to interact with other users; and from the sale of data generated from user-provided information.
This interim tax would be applied to companies with annual global revenues of over 750 million euros ($920.94 million) and EU revenues of over 50 million euros. This is to ensure that smaller digital companies will not be held back.
According to the European Commission, if member states implement a digital tax of 3 percent, they could generate about 5 billion euros in revenues per year.
‘This is not an anti-US tax’
Speaking to CNBC, following the announcement, Moscovici said the new rules aren’t a specific decision to target U.S. companies.
“It is not an anti-U.S. tax,” he said, “It is just about taxing properly those companies who generate value through digital activity in Europe.”
“It’s not a response to this or that decision taken by the U.S. administration recently, whether it’s tax reform or trade measures,” Moscovici said.
The relationship between the U.S. and Europe has suffered a setback recently, after President Donald Trump announced new tariffs on steel and aluminum on the basis of national security. Europe, a traditional ally of the U.S. doesn’t agree with the U.S. reasoning, and is currently looking to be exempted from those measures.