The European Commission (EC) is proposing to reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels. As the EC explains, the new system “secures a real link between where digital profits are made and where they are taxed”.
The EC is also calling for a 3 per cent interim tax which covers the main digital activities that currently escape tax altogether in the EU.
Steven Porter, Partner at Pinsent Masons, explains: “As it has been difficult for European countries to tax a share of the huge profits of the US owned tech giants under the existing international tax rules, the European Commission and the UK have proposed a new tax on the turnover of digital companies.”
The interim tax will apply to revenues created from activities where users play a major role in value creation and which are the hardest to capture with current tax rules, such as those revenues:
- created from selling online advertising space
- created from digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them
- created from the sale of data generated from user-provided information.
The proposal is that tax will only apply to companies with total annual worldwide revenues of €750 million and EU revenues of €50 million. This will help to ensure that smaller start-ups and scale-up businesses remain unburdened.
Commenting in a press release issued by the EC, Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue says: “Digitalisation brings countless benefits and opportunities. But it also requires adjustments to our traditional rules and systems. We 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.”
“The legislative proposals will be submitted to the Council for adoption and to the European Parliament for consultation.”
Mr Porter adds: “If we get an EU wide digital tax or the UK goes it alone with its own turnover tax on tech companies with large numbers of UK customers, we may well see an increase in the amount of disputed tax which is attributable to foreign companies.”
At Beavis Morgan, our dedicated technology business specialists work with entrepreneurial people in the tech sector, assisting with starting up, fundraising and investment, and advising on business growth and development, whilst all the time helping you navigate the maze of often complex tax issues.
We are also readily available to oversee HMRC disputes on your behalf, as well as to represent clients in appeal proceedings before the Tax Tribunal.
Contact Steve Govey for advice on how we can assist you and your tech business.
Further reading:
Is your business eligible for R&D tax relief?
Business opportunities for overseas investors looking to enter the UK market