Following the public consultation on fair taxation of the digital economy (as launched by the European Commission on October 26, 2017), the EU Commission is expected to publish on March 21, 2018 its draft proposal to introduce a tax for large digital enterprises up to 5% of gross revenues (the Draft Proposal).
The Draft Proposal seems to be based on the French-led proposal for equalization tax and proposes a tax rate between 1 and 5% on gross revenue for large digital enterprises performing certain digital activities (Gross Revenue Tax). In this respect it is envisaged that:
- a large digital enterprise would be recognized in case (i) its global gross revenues exceed EUR 750 million and (ii) digital sales activities within the EU exceed EUR 10-20 million.
- the scope of digital activities would include making available online advertisement space (or sale of related users data) as well as providing digital marketplaces and digital technology platforms connecting supply and demand of for instance digital taxi services, house rentals, etc.
It would be possible for companies to deduct the newly introduced Gross Revenue Tax as a cost for corporate income tax purposes, this to mitigate potential double taxation.
The Gross Revenue Tax deviates from currently accepted tax principles. It could result in effectively taxing loss-making companies (due to the fact that it is revenue based instead of profit based). Moreover, when comparing the Gross Revenue Tax to actual profits, the de facto effective tax rate would be substantially higher in case the business generates low margins.
It should be noted that the Gross Revenue Tax would be proposed as a solution for the short term (intermediary solution to be implemented as soon as possible). For the long term it would be envisaged to align the taxation on digital services by introducing a so-called digital permanent establishment and designing profit allocation rules in order to allocate profits to such digital permanent establishment, whereas this long term solution is subject to further work.
Please take into account that, since the EU Commission has not yet published the Draft Proposal officially, above thresholds and the specifics are subject to change. We will provide further/updated information once the Draft Proposal is published.