Tech firms may have to pay more tax in the EU under new proposals

Tech companies may have to pay more tax under new proposals announced by the European Commission.

The European Commission said that it has “proposed new rules to ensure that digital business activities are taxed in a fair and growth-friendly way in the EU.”

One of the proposals calls for allowing EU member states to tax profits that tech firms generate in their territory, even if they do not have a physical presence there.

Companies with a taxable ‘digital presence’ are described by the Commission as those that either exceed a threshold of €7 million in annual revenues in a member state, have more than 100,000 users in a member state in a taxable year, or have more than 3000 business contracts for digital services created between the company and business users in a taxable year.

The second proposal is the addition of an interim tax on revenue from certain digital activities “which escape the current tax framework entirely.” This will only be an interim measure until a more “comprehensive reform” has been implemented.

Top digital firms pay an average tax rate of just 9.5% in the EU which is less than half the 23.3% rate that traditional companies pay, according to the Commission.

Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue said:

“Digitalisation brings countless benefits and opportunities. But it also requires adjustments to our traditional rules and systems.

“We would prefer rules agreed at the global level, including at the OECD. But the amount of profits currently going untaxed is unacceptable. We need to urgently bring our tax rules into the 21st century by putting in place a new comprehensive and future-proof solution.”

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs added:

“The digital economy is a major opportunity for Europe and Europe is a huge source of revenues for digital firms. But this win-win situation raises legal and fiscal concerns.

“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. That’s why we’re bringing forward a new legal standard as well an interim tax for digital activities.”

The proposals still need backing from the European Parliament and the 28 EU member states.