Large digital companies operating in the European Union, such as Alphabet Inc. and Twitter Inc., could face a 3 percent tax on their gross revenue based on users’ locations, according to a plan by the European Commission.
The proposal by the EU’s executive arm outlines how a targeted levy on sales would increase the tax bill technology companies face, as the bloc seeks to raise money from an industry it says provides less than it should to public coffers. It follows calls by several countries led by France and Germany to look into methods to tax the firms, including Amazon.com Inc. and Facebook Inc., in a way that better captures the true value created in the region.
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The commission’s proposal comes amid renewed interest in technology companies, which are struggling to contain the fallout from a data security scandal that has raised the risk of a regulatory crackdown and sent their stocks plunging. The commission, seeking to close loopholes created by uncoordinated European regulation, says digital firms have an average effective tax rate of 9.5 percent, almost half of that the traditional businesses.
“The amount of profits currently going untaxed is unacceptable,” European Commission Vice President Valdis Dombrovskis said in a statement. “We need to urgently bring our tax rules into the 21st century by putting in place a new comprehensive and future-proof solution.”
The move could further strain transatlantic ties, following a series of spats between the EU and the U.S. ranging from trade protectionism to Iran’s nuclear accord and climate policy. The proposed tax is also set to draw the ire of U.S. companies, which have warned the bloc that such a tax could harm global business, as well as that of the U.S. Treasury, which has opposed proposals that single out digital companies.
“This proposal harms business certainty in Europe and would chill trade and investment from companies across the globe,” Dean Garfield, chief executive officer of the Information Technology Industry Council, said in a statement.
EU tax chief Pierre Moscovici told reporters in Brussels on Wednesday that the proposed levy wasn’t aimed at the U.S. nor was it meant to target specific nations or companies.
The levy will apply to revenues created from activities where users play a major role in value creation and which are the hardest to capture with current tax rules, the commission said. Its scope covers companies offering services such as advertising or the sale of user data. It would also cover services provided by multi-sided digital platforms, which let users find and interact with each other and where users supply goods and services directly to each other.
The levy would be charged annually and at a single rate across the EU of 3 percent, a level which would yield around 5 billion euros ($6.1 billion) a year, according to the commission. It would cover companies that have annual worldwide total revenue exceeding 750 million euros and total taxable annual revenue from offering digital services in the EU of more than 50 million euros.
The tax represents an interim solution, according to the commission, which plans to propose a more comprehensive approach to enable countries to tax profits made in their territory, even if the firm doesn’t have a physical presence there. Companies affected by these new rules would meet one of three criteria: Having more than 7 million euros in annual revenues from digital services; more than 100,000 users per year; or more than 3,000 business contracts for digital services created in a year.
Even as national governments accept that the current taxation system needs to be altered, the path forward is fraught with difficulties, with some countries warning that a new levy could discourage digital use and push customers to products outside of Europe. Any tax proposal will need the unanimous approval of all 28 current members of the EU before turning into law, so one country alone could block it.
Other countries have argued that discussions and decisions on this issue should be tackled at a global level and with the help of the Organization for Economic Cooperation and Development, a group that advises its 35 members on tax policy.
But a report by the OECD published on March 16 indicated that there is still no global consensus on how best to proceed with the taxation of the digital economy or on the merits of an interim solution.