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Why Europe is Imposing a New Tax on the Digital Sector

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Across the pond, the European Commission has approved a draft directive that aims to end the fiscal hole that was caused by the large multinationals in the digital sector.

This new regulation aims to allow member countries of the European Union to submit a billing tax to digital sector companies in their territories even though they do not have a physical presence within them.

So, how much will the new levy be? What activities will they tax?

The European Commission has established a rate for the new tax of between 1 to 5 percent. But the Commission recommends that all members adopt the same common 3 percent tax rate to avoid tax competition between countries.

The new tax will tax 2 types of income:

  1. Income derived from the profitability of user data. That is, those that are achieved through digital advertising or the sale of data from digital users to third parties.
  2. Revenue derived as an intermediation platform, such as those dedicated to offering hotel or transport services.

How much will the member countries raise? Where will the new lien be paid?

The European Commission is confident that with the new rate of 3 percent, revenue collected could reach 4.8 billion euros, although predictably the highest volume of collection will be achieved in those countries that have a larger digital population.

The European Commission has established requirements, by which companies in the digital sector will have to pay:

  • Global invoicing of more than 750 million euros.
  • Billing at European level of more than 50 million euros.

The tax will have to be paid in the national authorities of each of the countries, depending on the income obtained in the countries where the billing was generated.

Therefore, the European Commission proposes the creation of a digital single window to make it easier for digital companies to declare the tax and not have to repeat all the paperwork in the member countries of the European Union.

Which companies in the digital sector will be affected by the new tax?

Those companies that obtain great profitability by exploiting the data of their users such as Google, Facebook, Twitter, Instagram … will be considered the first category of digital companies that will be taxed.

The second type of companies that will be affected by the levy of this tax are platforms such as Airbnb, hotel service platform, or Uber, transport service platform, or all those platforms that facilitate the exchange of goods or services between different users or the purchase and sale of applications.

Other companies such as Apple or Amazon, companies also in the digital sector, will also be affected but to a lesser extent, because a large part of their business is focused on the sale of traditional products such as computers or books.

Netflix & Spotify will not be taxed, since the European Commission does not want to impose any tax on the distribution of digital content. However, the free Spotify service will be subject to tax payment by the party that exploits the data of its users.

Therefore, this directive will be applied to all companies in the digital sector, regardless of the country that hosts the company. European companies in the digital sector will also be included in the payment if they meet the conditions. But the billing factors allow to exclude a large number of companies, in particular, startups, small and medium companies.

When will this new tax be applied?

Although the directive has been approved, the application at the moment is unknown. The European Commission wants the application to be immediate so that the fiscal hole that increases with each passing day disappears. But this directive has to receive the approval of all the member countries of the European Union.

The major European economies such as Germany, France, the United Kingdom, Italy and Spain are in favor of the application because companies in the digital sector invoice in their countries without leaving tax revenues in these countries.

While small countries, where these types of companies can be established to reduce their taxes, raise their resistance, most notably Ireland, Holland and Luxembourg.

In no case will there be a flight of companies in the digital sector if this new tax is applied. None of the companies that are going to be affected can afford to dispense with  500 million consumers.

In addition, the European Commission knows that similar rates are being applied in India or Israel and even here in the US, and in none of these cases has there been an exit from these markets of companies in the digital sector.

Is the new lien a definitive solution for this type of company?

The new tax on the technology sector will be applied, since these types of companies do not fall within the traditional corporate tax system that is taxing companies based on the fiscal presence of a given country.

This has allowed companies in the digital sector to legally reduce the tax bill. The European Commission has established that on average they are only paying 9.5 percent compared to 23.2 percent of companies in traditional sectors.

The European Commission does not believe that this tax is a definitive solution, since it is a temporary action. In the long term, the European Commission proposes a tax harmonization of the corporate tax base that specifically includes the tax on digital activity.

In addition, a renegotiation of bilateral treaties of European Union members with third countries, such as the United States, to avoid double taxation is proposed as well. Stay tuned.

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