The European Commission has proposed new rules to ensure that digital business activities are taxed in a fair and growth-friendly way in the EU.

The measures would make the EU a global leader in designing tax laws fit for the modern economy and the digital age.

The Commission said in a statement the recent boom in digital businesses, such as social media companies, collaborative platforms and online content providers, made a great contribution to economic growth in the EU. But current tax rules were not designed to cater for those companies that were global, virtual or have little or no physical presence.

Nine of the world's top 20 companies by market capitalisation were now digital, compared to one in 20 10 years ago. The challenge was to make the most of this trend, while ensuring that digital companies also contributed their fair share of tax.

If not, there was a real risk to member state public revenues: digital companies currently had an average effective tax rate half that of the traditional economy in the EU.

Wednesday’s proposals came as member states sought permanent and lasting solutions to ensure a fair share of tax revenues from online activities, as urgently called for by EU leaders in October 2017.

Profits made through lucrative activities, such as selling user-generated data and content, were not captured by current tax rules.

Member states were now starting to seek fast, unilateral solutions to tax digital activities, which created a legal minefield and tax uncertainty for business.

A coordinated approach was the only way to ensure that the digital economy was taxed in a fair, growth-friendly and sustainable way.

Two distinct legislative proposals proposed by the Commission would lead to a fairer taxation of digital activities in the EU:

• The first initiative aims to reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels. This forms the Commission's preferred long-term solution.
• The second proposal responds to calls from several member states for an interim tax which covers the main digital activities that currently escape tax altogether in the EU.

Proposal 1: A common reform of the EU's corporate tax rules for digital activities

This proposal would enable member states to tax profits 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

-   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.

Ultimately, the new system secures a real link between where digital profits are made and where they are taxed. The measure could eventually be integrated into the scope of the Common Consolidated Corporate Tax Base (CCCTB) – the Commission's already proposed initiative for allocating profits of large multinational groups in a way which better reflects where the value is created.

Proposal 2: An interim tax on certain revenue from digital activities

This interim tax ensures that those activities which are currently not effectively taxed would begin to generate immediate revenues for member states. It would also help to avoid unilateral measures to tax digital activities in certain member states which could lead to a patchwork of national responses which would be damaging for our Single Market.

Unlike the common EU reform of the underlying tax rules, this indirect tax would apply to revenues created from certain digital activities which escape the current tax framework entirely. This system will apply only as an interim measure, until the comprehensive reform has been implemented and has inbuilt mechanisms to alleviate the possibility of double taxation.

The tax 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, 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 will help to ensure that smaller start-ups and scale-up businesses remain unburdened. An estimated €5 billion in revenues a year could be generated for member sStates if the tax is applied at a rate of 3%.

Next steps

The legislative proposals would be submitted to the council for adoption and to the European Parliament for consultation. The EU would also continue to actively contribute to the global discussions on digital taxation within the G20/OECD, and push for ambitious international solutions.