Taxation of digital transactions at the international level is coming – it’s just a matter of time. The OECD and the European Commission (EC) separately published recommendations for digital taxation earlier this year. In Part 1 of this two-part post I pointed out a helpful resource for tax directors who want a quick overview of those documents. I also covered some of PwC’s comments on the OECD initiative in that post; here, I’ll focus on the EC publication.
The EC argues that the amount of profits currently going untaxed within the European Union is unacceptable. A press release, cited in the PwC bulletin, notes that “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. This represents an ever-bigger black hole for member states, because the tax base is being eroded.”
The EC aims to fill that “black hole” through two legislative proposals. The first envisions a reform of the corporate tax rules that would enable EC member states to tax profits when a company has a “digital presence” that meets specified threshold criteria, such as having more than 100,000 users in the member state in a taxable year. The second is an interim tax on certain revenue from digital activities; this would apply only to large groups, with global gross revenues of 750 million euros or more. The PwC bulletin unpacks both proposals in some detail.
The proposals, especially the digital services tax (DST), have received a frosty reception among commentators in the United States; many have argued that the EC is unfairly targeting the largest U.S. tech companies.
Whether or not that’s the case, businesses “should consider whether their current or expected future services could be within scope,” notes the PwC report. And they should be on the alert for some situations they might not have expected: for example, “taxation of a transaction where neither the buyer or seller is in the EU, and where a taxpayer places an advertisement on a platform without necessarily owning that platform.”
No matter what, taxing digital transactions will continue to be a growing target for tax authorities that businesses of all sizes everywhere need to be prepared for. Keep checking in to Tax Matters as new developments unfold.
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