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Digital economy in the cross hairs of the EU Commission

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Summary: The EU Commission announced yesterday that it is proposing to increase tax take from large companies operating in the digital economy – in the short term by introducing a 3% ‘interim tax’ on certain digital activities which it thinks are currently not taxed (enough), and in the long term by trying to change the fabric of the international corporate tax system. This is important for many global companies operating across the EU.

Currently, most countries operate a tax system that taxes companies according to their physical location of assets or where companies are managed and controlled. The EU Commission is proposing to introduce measures to shift the system to taxing companies according to where their customers or users are based instead. EU Member States with a small human population but a large population of companies, such as Luxembourg, are likely to be the losers of such a systemic shift.

The 3% ‘interim tax’ would be charged on larger platforms only (worldwide revenues over €750m and EU revenues over €50m), on revenues from certain digital activities like selling online advertising space or selling data based on information provided by users of digital services – topical at the moment of course and, presumably, the EU Commission had social media platforms in mind here in particular.

The EU Commission estimates that, from this ‘interim tax’ alone, EUR 5 billion could be raised in revenues – to be collected by the Member States in which users of the digital companies are located. Based on that figure, it is easy to see how it may be tempting for some Member States to want to keep the ‘interim tax’ in place for as long as possible.

In a sense, the EU Commission is lagging behind the UK Government in making such proposals. The UK Government published a “position paper" in November 2017 (updated earlier this month), outlining the Government’s recognition of the changing landscape in which companies make money. User generated content for example does not easily fit into the current tax system’s concept of how business makes money. The UK Government is already looking to modernise the system accordingly and is, similar to the EU Commission’s proposals, focussing on the location of users and contemplating a long term system change coupled with an interim tax on revenue.

Whether the EU Commission’s proposals will amount to anything remains to be seen. Approval from all 28 Member States would be required, and perhaps unsurprisingly not all Member States are backing the proposals. The US are likely to resist strongly any moves to tax US global companies and will presumably make their influence felt at a political level.

Nevertheless, companies like Facebook and Google may well consider themselves to be in the cross hairs not just of data protection watchdogs, but now by the tax man as well.

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