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News New 3% Tax on Digital Business

On 21 March 2018, the European Commission proposed two measures focused on the taxation of digital businesses, such as social media operators, shared-economy platforms and providers of online content. Digital businesses currently have an advantage over traditional businesses; on average, digital businesses pay only half the tax of the traditional businesses. The EC is trying to respond to this situation and to achieve fair taxation for all types of businesses. The existing rules, based on the concept of permanent establishment, were made in the last century and have been used since then. These rules assumed the physical flow of goods and services to be the main source of income. Nowadays, when most of the value is created virtually, these rules are unable to fully cover the digital business.

 

The first measure is based on the introduction of a „digital presence“. The tax will be based on a number of users in the country. Companies will therefore pay taxes even in those countries where they are not physically present. A crucial factor in determining tax will be the place where the value or profit is generated. A company would be deemed to have digital presence in a country if at least one of the following criteria are met: 

 

  • company’s annual revenues from digital business in the country exceed €7m,
  • more than 100,000 users in the country in the taxable period
  • signing more than 3,000 business contracts on provision of digital services in the taxable period.

 Thanks to this system, there will actually be a relation between the place of digital income and the place of its taxation. The measure could eventually be included in the scope of a Common Consolidated Corporate Tax Base (CCCTB).

 

Another measure to be implemented by the Commission is the introduction of a 3% tax on gross revenues from certain digital activities. Some member states (Italy, Slovakia) are already introducing this tax, thus creating legal difficulties and increasing uncertainty among businesses.   The tax is to be applied on:

 

  • online advertising sales
  • digital mediation services that enable users to communicate with each other, and
  • profits from the sale of data and user-generated content

 This tax would affect both the cross border and the local services (to avoid unlawful discrimination).

 

The tax would be collected by those member countries, in which the users of respective digital business are present, and would only apply to companies with global revenues of €750m, of which at least €50m would have to be from the EU. This is to prevent the start-ups and smaller, fast-growing enterprises to be burdened by this measure. The Commission expects the tax to bring about €5m per year into the budget of member states. This tax would be an interim measure, which would only be effective until the adoption of a common digital taxation concept.  

 

Follow us for an information on the further development in the taxation of digital business.