Yahoo Finance EU launches £4.4bn tax raid on tech giants
The world’s biggest technology firms face an extra €5bn (£4.4bn) tax bill each year to operate in the EU as governments face “an ever-bigger black hole” in their finances.
Any company with global revenues of more than €750m and EU revenues above €50m faces a charge of 3pc of those revenues.
It will target companies that make money from digital marketplaces, apps to share goods and services, and online adverts – which include social networks, search engines and retail sites such as Amazon.
Between 120 and 150 big companies are expected to pay the charge.
“Our pre-internet rules do not allow our member states to tax digital companies operating in Europe when they have little or no physical presence here,” said European commissioner Pierre Moscovici.
“This represents an ever-bigger black hole for member states, because the tax base is being eroded. That's why we're bringing forward a new legal standard as well an interim tax for digital activities.”
Facebook, Google, Amazon, Uber, Airbnb and other large technology firms – typically from the US – are among the most high-profile firms which face the tax.
They tend to have less physical infrastructure than traditional businesses and rely more on "value" created by designers and tech staff around the world, making it hard to know how and where they should pay tax.
The European Commission believes that this is unfair, and that the situation is so severe that a new tax is needed right now, levied on income from digital and data-related services to “generate immediate revenues for member states… to ensure a level playing for all businesses” until a bigger reform of the tax system can be agreed.
Mr Moscovici denied that this is deliberately targeting companies from the US.
"Our proposal does not target any company or country. We estimate that 120 to 150 companies will fall into the scope of the proposals – they are Europeans, Americans, Asians and others," he said, adding that he spoke to US Treasury Secretary Steven Mnuchin to reassure him of this point.
"This new tax is entirely compatible with World Trade Organisation rules. There is no connection between this proposal andrecent trade developments."
Earlier this month, the EU threatened to target some of America’s most iconic brands if US President Donald Trump follows through on his threat to impose swingeing tariffs on imports of steel and aluminium.
Mr Moscovici said: "Europe is the world’s leading market for digital companies and has therefore felt the biggest impact from revenue losses. This tax base erosion will only increase as the digital sector grows."
The longer-term plan for a “comprehensive corporate tax framework” aims to tax companies in the same countries as their customers, not in their home nations.
The aim is to hit companies in every country where they have either revenues above €7m per year from supplying digital services, more than 100,000 users or more than 3,000 online business contracts.
It will then tax them based on profits from user data, such as advertising revenues; services connecting users such as "sharing economy" apps or marketplaces; and other digital services including subscriptions to music or TV streaming facilities.
This is only likely to be finalised after the UK has left the EU, however.
“These measures should fundamentally change how corporation tax is administered by capturing profits from the digital footprint of business,” said Anna Burchner at law firm CMS.
“It is probable that these proposals would take effect after the UK has left the EU. The applicability of any EU tax measures will depend on the outcome of on-going Brexit negotiations. UK businesses that operate in the EU will need to carefully consider whether they are still subject to EU tax provisions post-Brexit.”
The Information Technology Industry Council, which represents businesses including Google, Facebook and Amazon, said the tax system is indeed out of date but that this step will not help.
"By proposing a tax on digital advertising revenues and departing from established multilateral discussions in the OECD, this proposal harms business certainty in Europe and would chill trade and investment from companies across the globe," said its chief executive Dean Garfield.
"We strongly urge the EU to reconsider its approach and are committed to working with it to address these important international tax questions in a deliberate, constructive, and multilateral way.”
The EC itself said the measures should keep the EU open to technology companies.
Valdis Dombrovskis, another European commissioner, said: “Digitalisation brings countless benefits and opportunities. But it also requires adjustments to our traditional rules and systems.”
He said: “We would prefer rules agreed at the global level, including at the OECD. But the amount of profits currently going untaxed is unacceptable. We need to urgently bring our tax rules into the 21st century by putting in place a new comprehensive and future-proof solution.”
One crucial problem in the implementation of the levy is that international tax treaties are designed to stop companies being taxed twice once in their home country and again in their customers’ nations.
This EU tax risks breaking these treaties. As a result the Commission wants governments to re-write those rules to allow the new tax to go ahead.
“This would prevent a wide variety of different approaches that could undermine the level playing field and create new loopholes in the tax system,” it said.
