'It's happening': Firms will have to pay tax for 'digital presence' in EU
Business - 23 Feb 2018
Firms are set to become liable to pay tax in European Union member states in which they have a ‘digital presence’, even if they are not physically located there, after Pierre Moscovici, the European Commissioner for economic and financial affairs identified “a deep schism between where digital profits are generated and where they are taxed (if at all).”
The proposals have been approved by the European Parliament’s Economic and Monetary Affairs Committee, as part of a wider reform of tax legislation in the EU. The new rules would initially apply to firms with an annual turnover over €750 million ($922 million), but MEPs want this threshold to be reduced to zero within seven years.
Speaking at the ‘Masters of Digital’ conference in Brussels this week, Moscovici said: “Corporate tax frameworks… have not been able to keep up. They were conceived in a pre-internet age and are confounded by today’s mobile, globalised and digital companies. They rely heavily on the concept of physical presence and are underpinned by the simple principle that profits should be taxed where value is created.
“Digitalisation has shaken this principle to its core. In a digitalised world, it can be difficult to pin down the value that has been created, how it has been created, and where it should be taxed.”
Moscovici cited a social media company that “generates today well above half of its revenues from its international business. It offers services to consumers abroad and uses their data to further improve its services. It concludes contracts in foreign jurisdictions, taking full advantage of the infrastructure and rule of law institutions available there. Yet only 5 per cent of the taxes paid by this company accrue to these jurisdictions.”
Moscovici stressed that reform of the tax system for digital companies “is happening. And by that I mean that several Member States are determined to take action to address what they see as a ‘problem’ that must be ‘fixed’. This perception is now shared at the highest political level in many European governments. Digital taxation is no longer a question of ‘if’ – this ship has sailed.
He added: “Let me put this very plainly: either we move forward in an orderly fashion, or we move forward in a disorderly fashion. Member States are becoming increasingly frustrated at their inability to tax the high volumes of digital activity within their borders. Some have taken, or plan to take soon, unilateral measures in an attempt to solve the problem. A combination of fragmented, uncoordinated national ‘patches’ and solutions would negatively affect the single market, raise compliance costs and ultimately undermine competitiveness: that is the disorderly outcome we would very much like to avoid.”
Moscovici said that the proposals will address the problems of:
• “Where to tax: by finding a fair and balanced way to establish taxing rights, taking into account that a business may provide digital services to users in a market without being physically present.
• “What to tax: by establishing a fair and effective way to reflect new forms of value creation, such as the user contribution, in the allocation of profits.”
In a statement, the Economic and Monetary Affairs Committee said that the proposals “include benchmarks to determine whether a firm has a ‘digital presence’ within an EU member state which might make it liable for tax even if it does not have a fixed place of business in that country.”
It added that it “also urges the EU Commission to monitor technical standards for the number of users, digital contracts and the volume of digital content collected which a company exploits for data-mining purposes. These measures should produce a clearer picture of where a firm generates its profits, and where it should be taxed.
“Personal data is an intangible but highly valuable asset mined by firms like Facebook, Amazon and Google to create their wealth, but it is currently not considered when calculating their tax liabilities.”
Through the creation of a “one-stop shop for tax,” the committee said that firms “would calculate their tax bills by adding up the profits and losses of their constituent companies in all EU member states.
“Taxable profits would then be allocated to each member state where the firm operates according to a sharing formula based on sales, assets, and labour, as well as their use of personal data. The aim is to stamp out the current practice of firms moving their tax base to low-tax jurisdictions.”