“Bringing tax rules into the 21st century”: the European Commission’s proposals on digital taxation

In an increasingly digitised world, the huge profits generated by these companies are not being captured by the traditional tax rules. A statement released by the European Commission advocated in favour of bringing “tax rules into the 21^st century”, stating that “the amount of profits currently going untaxed is unacceptable”.

The European Commission’s proposals for reform are twofold. The first is an interim measure to be put in place until the second, longer-term proposal can be fully implemented.

Under the first proposal, Member States would receive an immediate return on revenues from digital activities that currently entirely escape the existing tax framework. These include revenues created from selling advertising space or from selling data generated from user-provided information. The tax will apply to revenues created from activities involving ‘value creation’, such as those:

(a)    Created from online advertising space;

(b)    Created from online/digital intermediary services (ie assisting with sales); and

(c)     Created from the information provided by content users being sold.

The temporary digital tax would only apply to companies with total global revenues of €750 million and EU revenues of €50 million, and would be collected from the Member State in which the users are located.

 In the long-term, the Commission proposes to reform corporate tax rules so that Member States can tax profits generated in their territory, even if the company lacks a physical presence in that state. Under the second proposal, a company will be considered as having a taxable “digital presence” if:

a)       It has more than 100,000 users in a Member State in a taxable year; or

b)      It has an annual revenue in exceedance of €7 million in that Member State; or

c)       It has created over 3000 business contracts for digital services with users in a taxable year.

Both the first and second proposals will now be submitted to the Council for adoption and to the European Parliament for consultation.  

Importantly, however, a change to tax rules at the European level requires unanimous approval from every Member State. Countries such as Ireland, the Netherlands and Luxembourg may be unwilling to approve this reform as they might view it as having a detrimental impact on their existing regimes and livelihoods. In fact, Ireland has already previously resisted orders from the EU to collect billions of euros’ worth of tax from tech giant Apple, and has pushed back against tax reforms of this very nature.

It remains to be seen, therefore, whether these ambitious reforms designed to modernise the tax system will come to fruition.