Debate Heats up in Europe on Taxing the Digital Economy

Decisions could profoundly affect certain companies’ tax burdens.

Both the OECD (the Organisation for Economic Co-operation and Development) and the European Commission have issued recent reports and suggestions for special taxes on digital companies. 

On 20 March 2018, the G-20 finance ministers signed off on the OECD’s interim report issued 16 March on taxing the digital economy. The interim report analyzes various country’s views on such taxation and measures they have adopted or intend to adopt for taxation of value created by digital companies. It discusses three main characteristics of highly digital businesses: 

  1. Cross-jurisdictional scale without mass, with businesses able to locate the production processes across different countries without significant physical presence;
  2. Reliance on intangible assets, including intellectual property that a business can own or lease from a third party; and
  3. A large role for data and user participation, such as social networks. 

The report attempts to establish guidelines for short-term measures, such as those being proposed by the European Commission. They should be temporary, targeted, and compliant with a country’s international obligations. But the OECD concludes there is no consensus on the need for or merit of interim measures to tax the digital economy and does not recommend the introduction of any such measures. 

For its part, however, the EU Commission has been pushing a stopgap tax on digital activities. On 21 March 2018, the Commission presented a long-awaited package of measures to tax companies engaged in digital activities.  The proposals would allow EU countries to tax digital companies operating in Europe even though they have little or no physical presence there. The EU proposes a temporary 3% revenue-based tax on specific digital activities, with user data and other factors considered in the allocation of profits to a particular jurisdiction.

A company would be within the scope of the proposed rules if it meets one of three conditions for having a significant digital presence: revenues from supply of digital services exceeding 7 million Euros, more than 100,000 users, or more than 3,000 online business contracts. However, the proposed tax would apply only to companies with worldwide revenue exceeding 750 million Euros and total annual revenues from digital activities in the EU of more than 50 million Euros.  

The interim tax would affect initially only between 120 and 150 companies, of which half would be American, one-third European, and the remainder Asian, according to the EU. However, critics contend that the tax would effectively apply only to American companies, and so far, only American companies have been specifically identified. And the tax is by no means popular in all EU countries. For example, Ireland has expressed disagreement, and Germany is reported to be reluctant to move forward. The U.S. Treasury Department has expressed considerable misgivings. Nevertheless, debate is moving forward on the concept of taxation of digital business without regard to physical presence.

How This Will Impact Mobility  

Worldwide ERC® member companies whose businesses are built on digital operations will need to pay close attention to these proposals, which may eventually profoundly affect their international tax burdens.

Read More