by Julie Martin
The EU Commission will propose a temporary EU-wide tax on digital firm revenue derived from activities that have high user involvement — such as online advertising and digital platforms like Airbnb — according to a leaked document published in Politico today.
The proposal calls for a tax at a single rate across the EU of 1–5 percent of gross revenues which would apply equally to cross-border transactions between EU countries, to transactions between EU countries and third countries, and to purely domestic transactions.
According to the leaked document, dated February 26, the proposed temporary tax would apply until EU agreement is reached on a long-term solution for taxing the digital economy or, in the case of third countries, until a Member State has renegotiated a double tax treaty with the third country to allow for a permanent solution.
The temporary tax would hit digital transactions that include a high level of involvement by a user, the Commission said, because such “user value creation” is not accounted for under current international tax rules. Specifically, the Commission is proposing to tax revenues derived in exchange for “valorisation of user data” — i.e., from selling advertising space on platforms such as Facebook or Google; from the sale of user data; and from digital platforms or marketplaces that rely on participation of end users, such as Uber or Airbnb.
Under the proposed temporary tax scheme, making available digital content or solutions would not be subject to the tax. Thus, excluded from the short-term tax is revenue from electronically supplied media, streaming, online gaming, IT solutions, cloud computing services, and “Fintech” activities.
Moreover, the Commission said the temporary tax should only be imposed on large firms, namely, those with annual worldwide total revenue over EUR 750 million (USD 914.8 million) and those with annual EU revenue that exceeds a set threshold.
For a long-term solution, the Commission proposes new rules establishing taxing rights based on a firm’s significant digital presence and adds new profit allocation rules.
The proposal calls for a directive that would apply to interactions between the EU States and countries with which EU states do not have tax treaties; it also includes a recommendation that EU States update their tax treaties with third countries. The scheme is thus designed so that the directive will not cause EU countries to immediately breach existing tax treaties. The Commission would seek international agreement on the plan through an update of the OECD Model Tax Convention. Once an agreement is reached on long-term tax rules, the short-term measures would cease to apply.
Companies located in EU countries and third countries with no double tax treaty would trigger a digital permanent establishment if one of the following criteria is met: the entity derives revenues from digital services in a Member State exceeding EUR 10 million (USD 12.2 million); active users of the digital service in a State exceed a to-be-determined threshold; or contracts concluded exceed a to-be-determined number.
The profit allocation rules would be updated to consider more than the functions, assets, and risks of the digital PE since value in the digital economy is created where users are based and data is collected and processed, the Commission said.
As such, additional criteria for attributing profit would include the location of 1) the users’ engagement and contributions to the development of the platform, 2) the data collected from users in a Member State through a digital platform, and 3) the number of users; and 4) user-generated content.
Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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