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By Joe Kirwin
The European Commission will include a call for a temporary tax on the advertising revenue of large internet companies, such as Facebook and Google, in its upcoming digital taxation legislation.
The legislation will also include a separate tax aimed at online platforms such as Amazon.com Inc., Ebay Inc., and Airbnb Inc.
The changes fit into a broader effort to crack down on tax avoidance in the digital economy and among large multinationals. A turnover tax on large internet companies was expected to be among the provisions. The temporary turnover tax, though divisive, could be seen as a step toward a permanent solution.
The digital tax package—due to be proposed by the end of March—will also include an amendment to the pending common consolidated corporate tax base (CCCTB) to introduce the concept of a virtual permanent establishment, according to a European Commission official who spoke to Bloomberg Tax on the condition of anonymity.
“The temporary levy will apply to multinational companies with a consolidated global turnover of 750 million” ($937 million), the European Commission official said. “The tax rate is not decided as of yet but we expect it to be anywhere from 0.1 to 5 percent.”
The digital tax legislation will also require a qualified digital company to have a taxable presence in each EU member state in which it does business.
“This is crucial to enforcing the concept of taxes paid where profits are earned,” the commission official said.
The digital turnover tax proposal will serve as a temporary measure until EU member nations can agree on a long-term permanent solution in the form of a “virtual” permanent establishment definition. It will be based on data collection, interactions with users, and the number of contracts a company has in a particular country, the commission official said.
The commission is considering using existing financial statements to verify a company’s turnover figures to impose the turnover tax on advertising, the official added.
“There is sufficient information in the accounting system of companies that can be used to determine the sales of digital goods and services to all EU countries without any significant additional administrative burden,” the European Commission official said.
Joachim Englisch, professor of tax law at the University of Muenster in Germany, told Bloomberg Tax a digital tax based on advertising revenue is the “lowest common denominator” solution because its scope is more limited than methods previously addressed by the Organization for Economic Cooperation and Development.
It is also likely that the advertising levy on large internet companies, as well as online platforms, are the most politically palatable, Englisch said.
“It might placate member states that see an urgent political need to act on the taxation of the digital economy and those that prefer a global solution under the auspices of the OECD,” Englisch said.
Over the past seven months, EU member nations have debated a potential turnover tax on digital companies.
France led a group of 10 other countries in September that demanded the European Commission propose a temporary turnover to ensure that the “Internet giants,” as French Finance Minister Bruno Le Maire calls Facebook Inc. and Alphabet Inc.'s Google, pay more in tax.
Meanwhile, smaller, low-tax countries led by Ireland—where Facebook and Google have their European headquarters and benefit from the nation’s 12.5 corporate tax rate—have insisted the EU must wait for the OECD to agree on a digital tax design as part of its base erosion and profit shifting reforms.
The European Commission official told Bloomberg Tax the EU executive body believes the best solution for the EU on the digital tax issue would be the adoption of the pending CCCTB proposal that includes a “permanent establishment” amendment.
“But the problem is that we already have three EU member states that have adopted their own version of a digital turnover tax on the national level,” said the commission official. “These three countries are Italy, Hungary and Slovakia. So we need a temporary measure on the EU level in order to prevent chaos in the EU single market.”
After the European Commission puts forward its proposal, it must be approved on a unanimous basis in the Council of Economic and Financial Affairs before it becomes EU law. If unanimous agreement isn’t reached, a special legislative procedure known as “enhanced cooperation” allows at least nine EU member nations to adopt EU legislation.
“I do believe that if there is not agreement in the Council of Ministers on the temporary measures by the end of 2018, there will be a move towards enhanced cooperation,” the commission official said.
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