Under the two directive proposals outlined on Wednesday, member states would be able to tax profits generated in their own territory, even if the companies didn’t have a physical presence there.
It means that firms like Amazon EU and Microsoft, which are domiciled in Luxembourg but whose services are used around the world, would pay taxes in several countries in addition to Luxembourg. It would offer a further blow to Amazon, which was ordered by the EU authorities to repay €250m to Luxembourg in tax, in a bid to prevent countries offering sweetheart tax deals.
Proposal 1
Companies would be eligible to pay these taxes if they have a significant digital presence in a member state. This is defined in one of three ways: either its annual revenues from digital services exceed €7m, it has more than 100,000 users accessing its digital services in a member state or if over 3,000 business contracts for digital services are created between the company and business users in a taxable year.
Profits from user data, for example through placing adverts, services connecting users like online market platforms and other digital services like streaming would be taken into account in the allocation of a firm’s profits. The proposed rules provide general principles for allocating profits.
Proposal 2: Interim tax
A second proposal outlines an interim 3% tax on revenues made from three main types of services where the main value is created through user participation. The three main services being targeted are online placement of advertising, sale of collected user data and digital platforms which enable people to interact.
This second proposal would be applied to firms with total annual global revenues of €750m and over or with over €50m in total annual revenue from digital activities in the EU.
The proposal aims to ensure digital service companies contribute to public finances the same way as traditional bricks and mortar businesses. According to the European Commission, the number of digital firms in the top 20 companies by market capitalisation rose from one in 2006 to nine in 2017.
“Our pre-internet rules do not allow our member states to tax digital companies operating in Europe when they have little or no physical presence here,” the European commissioner for taxation Pierre Moscovici said, adding: “This represents an ever-bigger black hole for member states, because the tax base is being eroded. That's why we're bringing forward a new legal standard as well an interim tax for digital activities.”