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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:
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
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
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.
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