Even if the rest of the rich world did not follow suit, the EU should proceed with an overhaul of taxes on digital firms, the European Commission said according to a draft report.
Accused of paying too little tax in Europe by routing most of their profits to low-rate countries such as Ireland or Luxembourg, the document is part of an EU push to tap more revenues from online multinationals such as Amazon and Facebook.
Brick-and-mortar multinationals pay in taxes in the EU more than twice what their digital competitors do on an average, the draft report said.
While digital giants do not pay more than 10.1 percent of taxes, traditional large firms face a median 23.2 percent tax rate. Data cited by the Commission showed that the effective tax rates of digital companies goes down to 8.9 percent when digital companies sell directly to customers, rather than to firms.
Between 2013 and 2015, just from Facebook and Google, now part of Alphabet, EU states may have lost in tax revenues up to 5.4 billion euros ($6.5 billion), said and earlier report by a European lawmaker.
“A level playing field is a pre-condition for all businesses to be able to innovate, develop and grow,” the Commission said, adding that fairer taxation of the digital economy was urgently needed.
The Commission’s report says that between 2008 and 2016, while revenues of the top-five online retailers, such as Amazon, grew on average by 32 percent per year, revenues in the EU retail sector grew on average by only 1 percent a year in that period partly because of the uneven taxation.
The 28 EU countries are expected to find common ground on digital taxation by December, despite divergences and scepticism among some smaller states. a summit of EU leaders on September 29 dedicated to digital issues will be the place where the document will be presented.
If the EU moves ahead on its own in this field, there are fears among certain members of the EU of losing competitiveness which has led to opposition and in a bid to reduce opposition from EU states, the Commission is seeking a compromise among rich countries worldwide.
But “in the absence of adequate global progress, EU solutions should be advanced within the single market”, the document said, adding that a legislative proposal may be presented in the spring regardless of global developments.
The Commission said that to allow digital firms to be also taxed in countries where they do not have a physical presence, the best way to tackle distortions would be to review the notion of “permanent establishment”.
Because they do not have a physical presence there, online companies can often avoid paying taxes in countries where they generate large revenues at the moment.
Consequently, already under discussion in the EU is a proposal to change the corporate tax base. The Commission believes that it represents “a basis to address these key challenges”, but needs the unanimous support of EU states to turn the plan into law.
short-term solutions could be considered to move ahead more quickly, the Commission said. the report said that an “equalization” tax on turnover is part of it.
(Adapted from Bloomberg)