The EC estimates that digital companies currently have an average effective tax rate that is half that of the traditional businesses in the European Union.
As part of the process of reforming the tax rules the is proposing an interim tax of 3 percent of profits and this is likely to hit digital giants such as Google, Facebook, Amazon and E-bay. An interim tax at 3 percent would raise an additional €5 billion in annual tax revenue across the Europe Union, the European Commission estimates.
One of the primary issues is that it is hard to levy tax from companies that have little or no physical presence in a country even though they are making money from having users, subscribers or customers there. The European Commission is proposing that companies where value is created by the presence of users should be taxed in proportion to there user/subscriber base.
The proposed threshold is if the company has more than €7 million in annual revenues in a member state or more than 100,000 users in a member state in a year or has more than 3000 business contracts for digital services in a year.
The interim tax would applied on such activities as the sale of online advertising; social media activities and platforms for the sale of goods and services between users and the sale of data generated from user-provided information.
The interim tax would be collected where the users are located rather than where the company is located and would only apply to companies with annual worldwide sales of €750 million (about $920 million) or European Union revenues of €50 million (about $60 million).
The proposals will next be considered by the European Council for adoption as European Union policy and go to the European Parliament for consultation and potentially eventual legislation. Meanwhile the European Union will continue to contribute to global discussions on taxation of digital companies within the G20 and the Organisation for Economic Co-operation and Development.
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