The UK Spring Statement contained similar proposals for a unilateral turnover tax, but only as an interim measure until international agreement could be reached on the taxation of corporate profits.
The global direction of travel was confirmed at the meeting of the foreign ministers of the G20 countries in Buenos Aires on 19-20 April. Among the many issues covered in the communiqué following this meeting, the OECD was tasked with continuing its work on the taxation of corporate profits with the requirement to produce a progress report 2019 and a clear plan for future changes in 2020.
With the prospect of at least two years, and perhaps anything up to five, before global agreement could be reached, the EC has been quick to act by announcing its own proposals.
These are likely to be popular with many voters, traditional bricks-and-mortar retailers and most European tax authorities. The data used to justify the proposals are dramatic. The EC states that the average effective tax rate paid by tech companies headquartered outside the EU is 9.5%, compared with 23.2% for traditional businesses headquartered in the EU. Noting that the largest digital companies have enjoyed annual growth of 14% while other multi-national corporations have to make do with 0.2%, the EC sets out its view that the traditional system of taxing profits is no longer fit for purpose.
The EC’s remedy has two parts. First, an interim solution targeted at tech companies with worldwide annual revenues in excess of €750m, and EU revenues in excess of €50m. Through a process of self-disclosure to a one-stop shop – a digital portal – in a single member state, affected tech companies will compute, disclose and pay their turnover-based tax liabilities. The portal state will then share information with other EU member states and allocate tax receipts to them. This is expected to raise €5bn a year.
Its proposals sit comfortably with the position paper update on corporate tax and the digital economy, published by HM Treasury as part of the 2018 Spring Statement. While many other member states also support the initiative, countries such as Ireland and Luxembourg have expressed profound reservations. It will be interesting to see how the debate develops within Europe as the proposals are fleshed out, debated and put to a vote.
The headline-catching interim solution is intended as no more than a precursor to new EU corporate taxes on digital activities under which online businesses will contribute taxes at the same effective rate as bricks-and-mortar businesses.
A tech company will fall within the new EU regime if it meets any one of three tests in any member state:
• turnover in excess of €7m;
• more than 100,000 users in a year;
• more than 3000 new business contracts for digital services created in a year.
The intention of the new regime, and this will be very difficult to achieve, is to link digital profits to the location where the profits are earned. While that accords nicely with the medium-term aims of the G20, the EU's attempts to achieve a collaborative tax system for businesses have not been crowned with success. The common consolidated corporate tax base (CCCTB) is a prime example of this.
However, it would be wrong to dismiss these latest proposals as fanciful and unworkable. While CCCTB has struggled to secure acceptance, the sheer scale of operations of the major tech companies, their impact on domestic businesses and the perceived loss of tax revenues by national tax authorities create the impetus to overcome past difficulties.
It's also worth noting that, while the EC emphasises that its proposals do not target American companies, the reality is that the lion’s share of the increased tax revenues will come from US companies. As I write this, President Trump has announced that he will exempt the EU from steel and aluminium tariffs, at least for the time being. If the US decides to retaliate against the EC’s tech tax proposals, withdrawal of these tariff exemptions is a near-certainty.
George Bull, senior tax partner at RSM