On 21 March 2018, the European Commission proposed new rules to ensure that digital (=e-commerce) business activities are taxed in a “fair and growth-friendly” way across the EU.
This followed an OECD report of March 16 revealing a lack of international consensus about taxing digital operators (Tax Challenges Arising from Digitalization –Interim Report).
And on June 21st , 2018, in a dramatic decision, the U.S. Supreme Court ruled that American states can impose sales tax on internet purchases even where the retailer has no physical presence in the state.
So there is definitely a convergence of policies to tax ecommerce in both the EU and the US. The OECD will have to catch them up.
Why does the EU want new rules for taxing the digital economy?
According to the European Commission, today's international corporate tax rules do not capture business models that can make profit from digital services in a country without being physically present.
In the digital economy, value is often created from a combination of algorithms, user data, sales functions and knowledge. For example, a user contributes to value creation by sharing his/her preferences (e.g. liking a page) on a social media forum. This data will later be used and monetised for targeted advertising. The profits are not necessarily taxed in the country of the user (and viewer of the advert), but rather in the country where the advertising algorithms has been developed, for example.
What is the European Commission proposing?
The Commission is progressing with two legislative proposals.
The first proposal responds to calls from several EU member States for an interim turnover tax which covers the main digital activities of large multinational groups that currently escape tax altogether in the EU.
Second, in the long term, the EU proposes a more general tax on a share of digital profits.
Short term EU proposal - interim tax on large multinationals
This interim tax would be imposed on turnover (rather than profits). It will be targeted at activities which are currently not effectively taxed and should begin to generate immediate revenues for EU States.
The proposed tax will apply to turnover (=revenues) created from activities where users play a major role in value creation and which are the hardest to capture with current tax rules, such as those revenues:
- created from selling online advertising space
- created from digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them
- created from the sale of data generated from user-provided information.
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.
This should help to ensure that smaller start-ups and medium size businesses remain unburdened. An estimated €5 billion in revenues a year could be generated for EU member states if the tax is applied at a rate of 3%.
This system will apply only as an interim measure, until the general reform has been implemented with mechanisms to alleviate the possibility of double taxation
Long term EU proposal - general reform of tax rules for digital activities
This proposal would enable EU member states to tax profits (rather than turnover/revenues) that are generated in their territory, even if a company does not have a physical presence there. The new rules would ensure that online businesses contribute to public finances at the same level as traditional 'brick-and-mortar' companies.
A digital platform will be deemed to have a taxable 'digital presence' or a virtual permanent establishment in a Member State if it fulfils one of the following criteria:
- It exceeds a threshold of €7 million in annual revenues in a Member State;
- It has more than 100,000 users in a Member State in a taxable year; or
- Over 3000 business contracts for digital services are created between the company and business users in a taxable year.
The new rules will also change how profits are allocated to Member States in a way which better reflects how companies can create value online: for example, depending on where the user is based at the time of consumption.
It appears that each EU member state would apply its own tax rates to resulting profits.
The legislative proposals will be submitted to the EU Council for adoption and to the European Parliament for consultation.
These EU proposals will affect non-EU online operators adversely. The recent Wayfair case in the US may have a similar effect there too. It remains to be seen whether the EU is targeting mainly online digital services whereas the US is targeting mainly online goods supplies.
If you are interested in contributing to and using an e-commerce taxation international database, please contact us.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
Leon Harris - Harris Consulting and Tax Ltd
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd