The European Commission has unveiled its proposals for increasing tax collected on digital services such as online advertising. As an "interim measure", large companies would pay a 3 percent levy on revenues generated from such services in the EU. In the longer term, EU members would be able to tax profits from the services if they exceed a certain threshold, according Telecompaper. The proposal follows repeated calls from EU states such as France and Italy for online companies like Google and Facebook to contribute more to taxes. The companies often don't have a significant physical presence in many EU states, even though they still count millions of users and customers who generate revenues. As a result of no physical presence, which is a key criteria for determining corporate tax liability, the profits are funneled to the company's home country or European headquarters, escaping tax in the country where customers are based. 
The European Parliament has already voiced its support for taxing companies with a 'digital presence'. It approved earlier this month the outlines of such a tax as part of a broader reform of EU tax law aimed at curbing tax avoidance by multinationals and simplifying the fiscal framework for large companies operating in multiple countries. 
The European Commission has attempted to address the matter in a number of state-aid cases against companies including Amazon and Apple, alleging the groups exploited differences in national tax law across the EU to avoid tax. Under the Commission's new proposal, which still requires approval from the Parliament and Council, the EU is taking a more pro-active approach and attempting to tax the companies at the source of their revenues. 
The initial tax of 3 percent would be applied on revenues "created from activities where users play a major role in value creation and which are the hardest to capture with current tax rules", the Commission said. This includes revenues from selling online advertising space, from digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them, and from the sale of data generated from user-provided information. 
The tax would be collected by the EU states where the users are located, and will only apply to companies with total annual worldwide revenues of at least EUR 750 million and EU revenues of EUR 50 million. The Commission estimates the tax could generate EUR 5 billion in tax income for EU states. 
Long-term digital presence
The 3 percent tax would apply until a more longer-term solution is put in place to tax profits from such services, even if the company does not have a physical presence in the country. The Commission also made a proposal on this front, setting criteria to determine whether a business has a taxable 'digital presence' or a 'virtual permanent establishment' in an EU. They would be subject to corporate tax if they exceed EUR 7 million in annual revenues in the EU state, have more than 100,000 users in the country in the course of the fiscal year, or generate over 3,000 business contracts for digital services in a year. 
The measure could eventually be integrated into the scope of the Common Consolidated Corporate Tax Base. That is the Commission's initiative for allocating profits of large multinational groups, which has already been approved by Parliament. 
Valdis Dombrovskis, the Commission's Vice-President for the Euro and Social Dialogue, said the EC "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."
OECD divided
The matter has already been taken up by the OECD, which released in the past week a report on digital tax issues at the G20 finance ministers meeting in Buenos Aires. The OECD report underlines the complexity of the problem and the difficulties in avoiding unintended side effects, both for the digital industry and the wider tax system. 
The OECD said over 110 countries have agreed to work on better coordination of tax laws for digital services. However, there is a significant divergence in standpoints, it noted. Some countries outside the EU advocate a different approach, based on developing international rules for a better allocation of taxable profit across countries. The OECD will continue to work with its members on possible solutions, as part of its wider project 'Base Erosion and Profirt Shifting', to combat international tax evasion. 
Industry opposition
The CCIA, an industry lobby group which counts among its members Google, Amazon, Facebook and eBay, immeditely came out against the Commission's proposals. The proposed turnover tax "is discriminatory and ignores the global consensus that the so-called ‘digital economy’ should not be singled out", the group said in a statement. It noted that digital companies "pay as high of an effective corporate tax rate as traditional companies" and called on the EU "to seek international tax reform through the OECD rather than pursuing discriminatory, unilateral actions with risks to Europe’s digital economy and international trade relations".