The EC has published proposals on the taxation of the digital economy in the Single Market and Recommendation on amending Member states’ Double Tax Treaties with Third Countries. A Digital Services Tax (“DST”) proposes to implement a short term interim turnover tax on digital businesses, whilst the proposal on significant digital presence, ie. Digital permanent establishment (“PE”) seeks to introduce EU-wide long-term measures that redefine the concepts of permanent establishment and profit allocation to account for users’ contribution as a proxy for value creation.
- Interim Measures/ Directive on DST: The draft interim measure proposes a turnover tax to be levied at 3% on the aggregated gross revenue of businesses with global revenue above €750 million and annual EU revenue above €50 million, with no deduction of costs, to apply to revenue made from targeted advertising based on user data collection and digital intermediation services of making available digital marketplaces.
- Long-term Measures/ Digital PE: The long-term measures propose revision of corporate taxation concepts of permanent establishment and profit allocation to account for digital activities. The directive proposes that the definition of permanent establishment should include a “significant digital presence”. A digital PE will be established when a platform either exceeds an annual turnover of €7 million, or has more than 100,000 users in a Member State in a taxable year, or has over 3,000 contracts for the provision of digital services in a taxable year, that would amount to a Digital PE.
- Recommendations relating to Double Tax Treaties: The third proposal in the EU digital taxation package sets out recommendations to Member states to renegotiate and adapt their double tax treaties with 3rd countries (non-EU) by way of extending the scope of the PE concept to include significant digital presence (digital PE) through which the business of an enterprise is wholly or partly carried out.
Tax policy proposals at EU level require unanimous consent by all EU MS to become European Union law.