The EU Economic Commission has released its proposal to enforce a 3% tax on the revenue of digital companies such as Google, Facebook, Twitter, and others, which would bring annually around 5 billion euro to EU member states. All these digital giants happened to be U.S. multinational companies that according to the proposal will be taxed based on their digital activities in EU member states. However, during the presentation of the proposal, the head of the Commission, Pierre Moscovici, pointed out that the proposal was not designed to target rich American tech companies only.
Although the proposed tax legislation is supposed to raise revenue in Europe, smaller states, including Ireland and Luxemburg, have expressed their concerns regarding the outcomes of digital tax on their economies. According to the European Commission, today large tech firms that operate in EU pay an average tax rate of just 9.5% compared to the 23.3% paid by traditional companies.
However, to become law, the proposal must be approved by the European Parliament and all 28 members states. It is expected to receive support by the Parliament, but most likely to be rejected by smaller states mentioned earlier.
EU proposes online turnover tax for big tech firms
BRUSSELS (Reuters) – The European Commission proposed rules on Wednesday to make digital companies pay more tax, with U.S. tech giants such as Google (GOOGL.O), Facebook (FB.O) and Amazon (AMZN.O) set to foot a large chunk of any bill.
However, many EU leaders, who will debate the issue of how to claw taxes from the elusive new digital economy at a Brussels summit on Thursday, oppose the executive’s proposals. Despite support from big powers Germany and, especially, France, that risks making it very hard to turn the idea into European law.
Under the Commission’s plan, companies with significant digital revenues in Europe will pay a 3 percent tax on their turnover on various online services in the European Union, bringing in an estimated 5 billion euros ($6.1 billion).
EU Economics Commissioner Pierre Moscovici brushed off accusations that he was going after rich American tech companies to enrich EU coffers at a time when the bloc is at odds with the Trump administration over trade and taxation issues.
“This is neither a GAFA (Google, Apple, Facebook and Amazon) attack nor an anti-U.S. attack proposal that will target any company or any country,” he told a news conference.
The tax would apply to large firms with annual worldwide revenue above 750 million euros ($920 million) and annual “taxable” EU revenues above 50 million euros.
The legislation comes as the United States unsettles Europe with its own tax reform and the threat of a trade war along with reports that Facebook user data was accessed by a consultancy to help President Donald Trump win the 2016 election.
EU antitrust authorities have also been busy investigating the business practices of Amazon, Google and Apple, leading to accusations, which the Commission denies, that it is targeting Silicon Valley.
While some smaller EU states such as Ireland and Luxembourg fear the proposed tax would undermine their ability to attract multinationals to base themselves in their jurisdictions, others see the measure as more likely to shift taxes toward bigger countries in the bloc rather than raising more revenue in Europe overall.
Irish Prime Minister Leo Varadkar called the measure “ill judged” and urged Brussels to wait and take its lead from global proposals planned by the OECD group of industrial states.
The tax, designed as a short-term measure before the EU finds a more comprehensive way to tax profits based on where they do business, could also encompass other high-profile U.S. firms such as Airbnb and Uber [UBER.UL].
It is designed to apply to activities in which users play a role in value creation – whether via online advertising, such as in search engines or social media, via online trading or in the sale of data about users.
The Commission said that top digital firms, whose average revenue growth of 14 percent far exceeded that of other multinationals, faced an effective tax rate of 9.5 percent, less than half the level of traditional companies.
The proposals require backing from the European Parliament, where there is considerable support. But tax reforms also need the backing of all 28 member states to become law.
Large EU states have accused the tech firms of paying too little tax in the bloc by routing some of their profits to low-tax member states such as Ireland and Luxembourg.
U.S. tech companies themselves have said they are paying tax in line with national and international laws and, in some cases, that the tax should be paid in the United States on profits repatriated there.
The proposal is to tax companies according to where their digital users are based.
EU diplomats predicted it would be hard to push through the legislation, among the most important for the bloc, because of deep divisions between larger countries set to gain more tax income and smaller ones set to lose.
Commission Vice President Valdis Dombrovskis said that the EU would prefer globally agreed rules, but that the amount of profits currently going untaxed was unacceptable.
The tax would apply to online advertising sales, which would bring in companies such as Google and Facebook, to platforms offering services such as interaction with other users or online sales and to those selling data generated from users.
The tax would be collected in countries where the users are located. Tech industry groups have complained that it is wrong to tax revenues as that would unduly hit companies. Some companies however could feel less pain than others.
Amazon declined to comment. The proposed tax is likely to have only a minimal impact as the company already posts revenues and pay taxes in Germany, France, Italy, Spain and Britain where it has dedicated country websites since 2015.
Facebook, which also declined comment, changed its accounting last year to record local advertising revenues in the countries where it is present instead of its Dublin base.
The Information Technology Industry Council, whose members include Amazon, Google, Facebook, eBay (EBAY.O) and Dropbox (DBX.O), warned that the EU plan may drive away investments and harm global trade.
The Association of Chartered Accountants (ACCA) was similarly skeptical that it would be temporary. “Over the years many ‘temporary’ or transitional tax measures have in fact become embedded into the economy, and negotiating changes to that status quo are far more troublesome than it would have been to implement a better solution from scratch,” Chas Roy-Chowdhury, ACCA’s head of Taxation, said.
Source: Reuters, Philip Bleinkinsop, March 21, 2018. Photo credit to Francois Lenoir.