The European Commission released a Communication on ‘A Fair and Efficient Tax System in the European Union for the Digital Single Market’ in September 2017. It emphasised the need for a new tax framework that is up-to-date with digital business models. It identified some currently existing tax loopholes, for example, regarding revenues deriving from targeted marketing on social media.
Having been endorsed by the EU member states, the Commission has proposed legislation on this matter on 21 March 2018. The proposals take the form of two directives, which are to be transposed in EU member states. Below you will find the key points.
1. Directive laying down rules relating to the corporate taxation of a significant digital presence
The first directive lays down rules relating to the corporate taxation of a ‘significant digital presence’. It would make it possible for EU member states to tax profits that have been generated in their territory even if a company does not have a physical presence there. The member states’ right would depend on the company’s revenue from the supply of digital services, the number of online users or the number of business contracts for digital services. The directive is likely to capture all the major online platforms: Google, Facebook, Twitter, Amazon etc.
The EU member states are recommended to extend the proposed taxation solution to their double taxation treaties with non-Union jurisdictions.
2. Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services
The second directive applies to revenues created from certain digital activities which escape the current tax framework. The Commission is proposing the adoption of an interim measure throughout the EU in order to avoid fragmentation caused by national unilateral taxation measures and to pave the way for a more comprehensive solution to be agreed at the international level.
This directive focuses on revenues created from activities where users play a major role in value creation and which are the hardest to capture with current tax rules. It includes revenues resulting from:
– the placing on a digital interface of advertising targeted at users of that interface
– the making available to users of a multi-sided digital interface which allows users to find other users and to interact with them, and which may also facilitate the provisions of underlying supplies of goods or services directly between users
– the transmission of data collected about users and generated from users’ activities on digital interfaces
Tax revenues would be collected by the member states where the users are located, and will only apply to companies with total annual worldwide revenues of €750 million and EU revenues of €50 million.
The taxes on placing adverts would apply whether or not the digital interface is owned by the entity responsible for placing the advertising on it. The entity placing the advertising, not the owner of the interface, shall be considered to be providing a service falling within the taxation regime.
The above means that agencies with a turnover of more than €750 million globally and €50 million in the EU that place adverts on any software, including a website or a part thereof and applications, including mobile applications, would be subject to a special tax rate of 3%.
The draft directives have been transferred to the European Parliament and the Council of the EU to form their positions. In order to be adopted, all the member states have to unanimously support the proposals in the Council.
EACA is ready to form an advocacy position regarding the second directive. For this purpose, a working group will be set up.