The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
Penny Sukhraj London
By Joe Kirwin
The European Commission proposed March 21 a 3 percent turnover tax on large internet companies such as Amazon.com Inc., Google Inc., and Facebook Inc. in order to force them to pay their share of “fair” taxes where revenues are generated.
Digital companies with an annual global turnover of 750 million euros ($920 million) and 50 million euros in sales in the EU would be subject to the turnover tax. Most of the eligible digital companies are U.S.-based multinationals.
The tax would be imposed on the advertising profits on a country-by-country basis earned from online platforms such as search engines or social media sites.
In addition, 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.
Deemed an “interim” measure, the turnover levy is part of a two-pronged approach to adapt EU corporate tax law to the rapid growth of the digital economy.
The “permanent” part of the reform calls for an amendment to the pending common corporate tax base legislation to include “virtual permanent establishment” companies, netting online-based businesses.
“Our pre-internet rules do not allow our member states to tax digital companies operating in Europe when they have little or no physical presence here,” European Commission Taxation Commissioner Pierre Moscovici said in a statement.
He insisted that companies such as Google and Facebook pay half the tax rate of traditional companies and this “adds an ever-bigger black hole for member states because the tax base is being eroded.” He also said the new interim tax would add a minimum of 5 billion euros ($6.1 billion) in tax revenue in the EU.
All 28 EU member states must approve the proposal before it becomes law. Ireland, where a number of large U.S. Internet companies are based, as well as other EU countries, insists the EU must wait for a global consensus from the Organization for Economic Cooperation and Development before the interim turnover tax can be approved.
Irish Finance Minister Paschal Donohoe issued a March 21 statement noting that the OECD failed to find a consensus on digital taxation in its March 16 interim report. “This is the beginning of a process that will go on for sometime in parallel with the work of the OECD,” Donohoe said.
However, the five largest EU member nations—Germany, the U.K., France, Italy and Spain—issued a March 21 statement insisting the interim turnover tax proposal should be an “impulse” for the OECD process as well as for the Group of 20 nations. Meanwhile, they said the plan provides a basis for “coordinated EU action to effectively align the taxation of highly digitized business profits with the place where value is created.”
In the past year, Hungary, Slovakia and Italy adopted national digital online turnover tax regimes targeting large internet companies. These moves, the commission said, make an EU turnover tax urgent.
“By agreeing on a coordinated EU-wide approach we will ensure the integrity of the digital single market,” the five EU member nations said in their statement.
The U.S. Chamber of Commerce to the EU, which includes some of the tech companies impacted, also weighed in on the issue by insisting the commission’s interim turnover tax “may make it more difficult” to find consensus in the OECD.
The claim that large digital companies pay less tax than traditional companies is disputed by some economists, including University of Stuttgart-based Christoph Spengel, who has completed various corporate tax studies for the European Commission. He told Bloomberg Tax in a March 20 email that “effective tax rates for digital and traditional businesses cannot be compared one-by-one” because digital businesses earn different types of income, such as royalties.
The new turnover tax is also expected to further strain EU-U.S. trade tensions—already troubled because of pending U.S. steel and aluminum tariffs that could hit EU companies.
“This tax can be seen as the world’s first digital service tariff,” Edwin Visser, tax partner and member of PwC’s global tax policy group, told journalists March 20 in a conference call.
Moscovici strongly insisted the proposal isn’t aimed at U.S. tech companies.
“By our estimates, there are between 120 and 150 companies that would be in the scope of the tax, and one-third of those are European or Asian,” Moscovici said.
The former French finance minister acknowledged that the preferred solution to the issue of digital tax is an amendment to the common consolidated corporate tax base that would establish a virtual permanent establishment. The threshold for which companies would be included in the scope of the PE would be: a threshold of 7 million euros ($8.54); more than 100,000 users in a member nation; and more than 3,000 business contracts for digital services created between the company and users in a taxable year.
However, EU member nations have been unable to make progress on the CCCTB since it was first proposed in 2011. Small low-tax EU members oppose any kind of an apportionment formula that would require them to transfer tax revenue to another EU nation.
The heightened political, economic, and trade implications of the new turnover corporate tax reform proposal tax proposal pushed European Council President Donald Tusk put it on the March 22 agenda of an EU summit to be attended by the 28 EU leaders.
Further underscoring how politicized the issue of taxing the digital economy has become, most of the leading internet companies contacted by Bloomberg Tax refused to comment. However, the Computer & Communications Industry Association, speaking on behalf of members that include Amazon, Google, Facebook, Ebay and Uber, sharply criticized the proposal. In a March 21 statement, it said targeting online platforms is “discriminatory” and harmful to the growth of the digital economy.
“This ignores the global consensus that the so-called ‘digital economy’ should not be singled out,” the CCIA said in a March 21 statement. “Our economies are increasingly digital and digital companies pay as high of an effective corporate tax rate as traditional companies.”
For an online merchant like Amazon, the intermediate tax on online platforms will have a minimal impact on its online retail operations, as most of its profits are earned from direct sales, which are exempted from the turnover tax.
“The key problem with this proposal is that it favors non-EU-based online platforms that sell to EU citizens via small merchants in the EU, as the tax will not apply to them,” said an Amazon official, who spoke to Bloomberg Tax on the condition of anonymity. “This will certainly be a disincentive to invest in the EU.”
Facebook Spokeswoman Ana Gradinaru said the Silicon Valley company would have nothing more to say other than to emphasize that as of December 2017, the company decided to book its advertising revenues in the EU member nations where they are earned and not through its European headquarters in Ireland.
Google, Airbnb,. and Uber didn’t respond to requests for comment from Bloomberg Tax.
The turnover proposal wouldn’t apply to online streaming services such as Netflix Inc. or Spotify Ltd.
As for whether companies targeted by the tax would have legal grounds for a discrimination complaint, Joachim Englisch, a professor of corporate tax law at the University of Muenster in Germany, told Bloomberg Tax it would be possible the companies could file an appeal based on Article 20 of the EU Charter of Fundamental Rights, which assures non-discrimination.
“This scenario is particularly likely if the proposal should be adopted only by a smaller group of member states using the so-called enhanced cooperation procedure,” Englisch said in a March 20 email. Enhanced cooperation is a legislative procedure that allows EU member nations to move ahead with legislation when unanimous consent can’t be achieved.
To contact the reporter on this story: Joe Kirwin in Brussels at firstname.lastname@example.org
To contact the editor responsible for this story: Penny Sukhraj at email@example.com
Copyright © 2018 Tax Management Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)