The international tax laws that we work with were designed before globalisation and digitisation; as far as the modern digital economy operates, they are not fit for purpose. In short, the current tax framework does not generate tax fairly in the country where the value is created – companies such as Amazon, Google, and Facebook have all faced criticism for this.
The European Commission (EC) believes the rules need changing to:
- create a fair taxation system for all businesses
- support business growth in a competitive economy
- generate sustainable tax revenues.
What is the European Commission proposing?
Digital companies continue to show rapid growth, when compared to non-digital businesses, so the disconnection between where digital businesses generate profit and where they pay tax is growing. On 21 March 2018, the EC announced proposals to deal with this problem with the stated aim of: ‘A Single Market in which digital companies can do business and grow, while paying their fair share of taxes.’
To achieve this, the EC put forward two measures. The first proposal is a long-term solution, forcing companies to pay tax in each Member State once achieving any, not all, of the following:
- revenue of more than €7 million
- more than 100,000 users
- more than 3,000 online contracts to supply digital services.
The second measure is an interim solution that tries to close the gap in the short term. It is also designed to stave off the urge for individual Member States to act unilaterally, moves that are already underway and which the EC believes will disrupt the Single Market. The interim proposal takes the form of a 3% charge on profits from three revenue sources:
- online advertising
- the sale of user data
- digital platforms that allow users to interact with other users.
This interim proposal applies to businesses with annual worldwide revenue exceeding €750 million and total EU revenue exceeding €40 million (this has reduced from the original EC proposal of €50 million).
Why is there a problem?
Not everyone is happy, and the proposal requires all 28 Member States to agree. So why the unrest?
Some fear retaliation from the United States, a fear that is not misplaced as the companies being targeted are mostly US businesses. Others are already developing their own digital tax arrangements, which they may prefer to the proposed EU solution. And Ireland has vested interests – Google, Apple and Facebook all have a presence in Ireland.
Here in Poland, the government is ready to accept the proposals. The Polish Ministry of Finance believes that the proposed changes to the system of international taxation of the digital economy are in line with Poland’s fiscal interests. Consequently, the Council of Ministers has given its support to solutions contained in the EC directive.
The energy behind the drive for taxing the digital economy originally came from two of the European powerhouses: France and Germany. Of late, Germany has reeled in its enthusiasm, but France is still keen to forge ahead, believing that an EU digital tax could smooth the way for proposals for a global solution from the Organisation for Economic Cooperation and Development (OECD).
The situation is fluid, so watch this space.
AUTHOR: Justyna Kyć, Russell Bedford Poland, Warsaw, Poland