The European Commission has announced plans for an interim 3% tax on the digital revenues of the biggest technology firms, including money generated by online advertising and the sale of user data.
The proposed tax – which must be approved by all EU member states before it passes into law – will target companies with annual global turnover above €750 million ($921 million) and taxable revenues of €50 million that are generated within the European Union.
Estimated revenue is about €5 billion a year, collected from more than 100 companies.
Brussels is hoping to change global rules on how digital companies are taxed, to ensure they pay wherever they make sales and not just in the countries where they are physically located.
The aim is to cut down on tax dodging by some of the highest earning international companies.
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International tax reform for the digital economy will take time to achieve, and the EU and US are part of more than 100 countries working with the OECD to agree on global rules.
The OECD has stated that it hopes to have a workable solution to the problem by 2020.
The tax announced today by the European Commission is intended as a stop gap before wider rules come into effect. It is accompanied by another plan to tax digital profits wherever they are generated, even if companies have no physical presence in the country.
The Commission calls this measure its “preferred long-term solution”.
Pierre Moscovici, European commissioner for tax, was quoted in the Financial Times saying:
The digital economy is a major opportunity for Europe and Europe is a huge source of revenues for digital firms. … (but) 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.
That’s why we’re bringing forward a new legal standard as well an interim tax for digital activities.
The move towards increasing tax on digital companies faces significant opposition in the US, where many of the biggest firms are based.
The US Treasury Secretary Steven Mnuchin last week said:
The US firmly opposes proposals by any country to single out digital companies
In a statement issued today Valdis Dombrovskis, vice president of the European Commission, argued that changes to the way these companies are taxed are unavoidable.
Digitalisation brings countless benefits and opportunities. But it also requires adjustments to our traditional rules and systems. We would prefer rules agreed at the global level, including at the OECD. But the amount of profits currently going un-taxed 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.