EU Should Consider Lowering Threshold for Digital Tax: Document (1)

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By Joe Kirwin

The European Union should consider abandoning the 750 million-euro threshold it would use to apply a new tax on digital companies, according to a document from EU presidency holder Bulgaria obtained by Bloomberg Tax.

Instead, EU-member nations should consider applying the tax to companies that generate more than 50 million euros ($58 million) within the EU during the relevant financial year, according to the document, prepared in advance of a private June 13 meeting among tax experts of the EU member states.

Dropping that revenue threshold—one of two parameters—could add hundreds more companies to the tax rolls, according to two EU diplomats who spoke to Bloomberg Tax on the condition of anonymity. The tax is aimed at large digital companies like Alphabet Inc.'s Google and Facebook Inc.

The original proposal sets a 3 percent digital transaction tax on digital companies with annual global revenue of 750 million euros or more. In the Bulgarian document, the threshold of 750 million euros or more is in brackets, indicating—as per standard legislative convention—text that is targeted for removal.

The document asks member nations to “consider reviewing the thresholds.”

Neutrality Needed

Estonia’s undersecretary for taxation, Dmitri Jegerov, who is considered one of the top experts on digital taxation in the EU and led preliminary negotiations on the proposal, told Bloomberg Tax in a June 18 email that removing the 750 million euro threshold is crucial to ensure neutrality.

“You could have a company with 740 million euros annual turnover not paying the tax even if all its revenue come from otherwise taxable activities while a 760 million euro company with a taxable revenue of 60 million euro will be taxed,” Jegerov said. “We see this as a very, very serious issue in tax neutrality. In this respect we would welcome the proposal to remove the 750 million threshold.”

The initial proposal, rolled out March 21, could affect as many as 150 companies, European Taxation Commissioner Pierre Moscovici said when it was unveiled. It is intended to be a temporary step until the EU nations and the OECD agree on a long-term solution.

The proposal can’t pass without consensus within the bloc. And the suggested change will likely rankle countries like Ireland that have already dug in against the concept. Ireland has a 12.5 percent corporate tax rate and is home to many large digital companies.

“Governments’ support for the proposed digital turnover tax seems to diminish as they realize how it would hurt digital innovation, investments and discriminate against small businesses that use online platforms to sell globally,” Christian Borggreen, the vice president of the Computer and Communications Industry Association, told Bloomberg Tax in a June 18 email. The association’s members include Amazon.com Inc., eBay, Facebook, and Google.

‘Narrowing’ the Reach

The document also proposes “narrowing down the scope” of the proposal by dropping “the transmission of data collected about users and generated from users’ activities on digital interfaces” from the list of services that can qualify as taxable revenue.

EU diplomats said the discussion on changes to the scope among EU member nations’ tax experts has gone beyond eliminating just the resale of data.

“The question that has been prominent is the discussions is whether or not the scope should be limited to one category of activities involving the placing on a digital interface of advertising targeted at users of that interface using data collected on users,” an EU diplomat said.

Such a restriction would potentially eliminate intermediates that “make available to users of a multi-sided digital interface, which allows users to find other users and to interact with them and which may also facilitate the provision of underlying supplies of goods and services directly between users,” the diplomat said.

The proposal says large “intermediate” online merchants and service providers such as Amazon and Ebay Inc., as well as Airbnb Inc. and Uber Technologies Inc., would be assessed for a 3 percent levy. Another EU diplomat told Bloomberg Tax there has been discussion about reducing that levy.

Negotiations on the proposal will continue when Austria assumes the rotating EU presidency on July 1, Bulgarian spokeswoman Genoveva Chervenakova told Bloomberg Tax.

EU finance ministers are due to meet June 21 in Brussels but Chervenakova said the proposal won’t be discussed. Instead a “progress report” will be drawn and submitted to EU heads of state and government when they meet June 28 and 29 in Brussels.

To contact the reporter on this story: Joe Kirwin in Brussels at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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