The EU ‘digital tax’ explained

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The European Commission’s plan to tax the digital turnover of larger companies was the topic on everyone’s lips at the 2018 European Business Summit. So what is this new law that has everyone talking? Euronews reporter Sasha Vakulina explains.

What is the proposal?

There are two different plans in the pipeline:

1. The first, a long-term solution, would aim to completely reform tax rules so that companies pay taxes in the countries where they have “significant interaction” with users through digital channels.
2. The second proposal, an ‘interim tax’—designed to be a quick fix while waiting for comprehensive reform to be put in place— would apply to revenues from some digital activities which escape under the current tax framework. This would include activities such as selling online advertising space and the sale of user-generated data. These tax revenues would be collected by member states where the internet users are located, rather than where the company has its headquarters. The Commission is calling for a tax rate of 3%.

Which companies would be affected?

The interim rules would only apply to large companies with annual global revenues of over €750 million and annual EU revenues of €50 million.

Why are they doing this?

Tech giants are accused by some states of paying too little tax in Europe by exploiting the current system. The European Commission claims that digital companies have an average effective tax rate that is half of that in the traditional EU economy.

According to European officials, around 200 companies, such as Google, Facebook and Amazon, are expected to fall within the scope of the new tax, an estimated income for the EU of around €5 billion.

What happens next?

The draft proposals have divided nations, with many fearing provoking the United States, which could see the move as an attack on its tech companies. Several countries’ leaders have also criticised the plan, claiming only a global solution will work. Either way, it will be an extremely difficult reform to push through as tax policy decisions need unanimous approval from all member states.