Tax News 2018

Taxation of Digital Economy

Dean Košar Dean KošarDean Košar

EU Proposes Reform of Digital Economy Taxation

The European Commission proposed new rules for a more equitable taxation of companies

The digital economy is on the rise in EU Member States. Today’s tax treatment of digital services is not fit for the realities of the modern global economy and puts the Member States’ tax revenues at risk as they cannot tax profits from digital activities. That is why the European Commission proposed a tax reform of digital activities which would enable a fairer taxation of digital businesses.

Grounds for Reform

Digital businesses in the EU are experiencing a significant boom. They are growing at a remarkable rate, however, the current tax rules have failed to keep pace with the digital revolution. Therefore, digital businesses are taxed more favourably than the traditional “brick-and-mortar” companies physically present in the EU. Currently, the effective tax rate for digital businesses is half the rate applied to traditional businesses.

As the applicable tax rules for digital and traditional companies do not ensure a level playing field, some EU Member States seek unilateral solutions to increase their tax revenues from digital activities. To this end, the European Commission presented two legislative proposals to ensure a more equitable taxation of all companies in the EU.

Reform of the EU's Corporate Tax Rules

The first proposal for a directive lays down the corporate income tax rules regarding a significant digital presence. This measure would enable Member States to tax profits created in their territory by digital businesses, even if they do not have a physical presence there. Member States would collect taxes on digital activity where the users of digital services are located.

In accordance with the Commission's proposal, a digital platform will be deemed to have a significant digital presence in a Member State if it fulfils one of the following criteria:

  • it exceeds a threshold of EUR 7 million in annual revenues from digital services in a Member State;
  • it has more than 100,000 users in a Member State in a taxable year;
  • over 3000 business contracts for digital services are created between the company and business users in a taxable year.

According to the new tax rules, profits from digital activities should be taxed in the Member States where the value is actually created. The thresholds for establishing a significant digital presence in a Member State are set sufficiently high to avoid the taxation of small businesses for which the tax liabilities would exceed the profits from digital activities.

The proposal redefines the term “business unit” (of taxable persons) as defined in the [Slovene] Corporate Income Tax Act (ZDDPO-2), which will, in future, also cover companies which do not perform traditional activities and are not physically present in Slovenia. If a foreign company meets the above-mentioned user criteria, it shall be obliged to pay corporate income tax in accordance with ZDDPO-2 like any other taxable person. However, this does not mean that the foreign company will have to establish a branch or a company under the [Slovene] Companies Act (ZGD-1).

Tax on Certain Revenue from Digital Activities

The second proposal of a directive introduces a new interim tax on certain revenue from digital activities. The proposed taxation would apply only during an interim phase pending the adoption of a comprehensive reform with measures to reduce double taxation.

The tax would apply to revenues created from certain digital activities which escape the current tax framework entirely. These include revenues created from the sale of online advertising space, digital intermediary activities and the sale of data generated from user-provided information. The interim tax revenues would be collected by the Member States in which users are located.

Subject to the interim tax would only be the companies exceeding:

  • total annual worldwide revenues of EUR 750 million and
  • EU revenues of EUR 50 million.

An estimated EUR 5 billion in revenues a year could be generated for Member States if the tax is applied at a rate of 3%.

Cooperation between Member States

The European Commission’s proposal also provides for the cooperation between Member States in form of a “one-stop shop“ which would enable taxpayers a uniform fulfilment of their administrative obligations relating to the new tax (identification, reporting and payments). Furthermore, taxpayers should also be able to deduct the tax on digital services from the corporate income tax to avoid double taxation.

Further steps

The legislative proposals will be submitted to the Council for adoption and to the European Parliament for consultation.