The European Commission has proposed new rules to tax tech and online businesses where perceived value is generated by user input.
Of the two proposals raised, the first identifies that a digital platform has a taxable ‘digital presence’ or virtual permanent establishment if it exceeds any of the following three thresholds in a member states:
- Annual revenues of €7m
- Users of 100,000
- Business contracts for digital services of 3,000
The proposal also looks to attribute taxable profits to value generated by user data in the location of that user. For example, where a user based in Slovenia provides personal information about their interests through social media and this is then sold to an online advertiser, the proposed rules allocate the related profit to Slovenia and therefore subject it Slovenian corporate tax. It also targets profits perceived to be generated in user locations by online marketplaces, shared economy platforms and subscription streaming services.
Intended as a long term strategy, this first proposal would require the reform of corporate tax rules in EU member states to take effect. In instances where the entity making the relevant sale (ie the entity selling the user data to the online advertiser) is not based in an EU member state, and that jurisdiction has a double tax treaty with the member state where the value generating user is located, the double tax treaty would also need to be amended accordingly.
The European Commission’s second proposal is an interim tax of 3% on revenues from online placement of advertising, sales of collected user data, and digital intermediary activities which facilitate sales between users. Intended as an interim measure while the first proposal is implemented over time, this would apply only to businesses with total annual worldwide revenues of more than €750m and total annual EU revenues of more than €50m.
The proposals are broadly consistent with the UK government’s updated position paper published in March 2018 which sets out the view that the international corporate tax framework should be reformed to reflect the value of user participation in digital business and recognises revenue tax as a possible interim measure. The UK government sees the longer term solution as requiring international consensus including that of the G20/OECD Digital Task Force which also in March 2018
published an interim report on Tax Challenges Arising from Digitalisation
. This report similarly highlights the importance of user generated data in value creation but does not recommend the introduction of interim measures citing the lack of consensus on their merits and necessity. We will update you on any further changes that are published but any feedback you have is encouraged.
For more information please contact Chris Heath