Large digital companies operating in the European Union, such as Alphabet Inc. or Twitter Inc., could face a 3 percent tax on their gross revenues based on where their users are located, according to a draft proposal by the European Commission.
The draft circulated Friday according to Bloomberg outlines how a targeted levy on gross revenues would increase the tax bill digital giants face, as the bloc seeks to raise money from an industry it says provides less than it should to public coffers. EU countries have been looking into methods to tax digital companies, including Amazon.com Inc. and Facebook Inc., in a way that captures the true value created in the region.
The commission’s planned revenue tax, which is expected to be proposed on March 21, would only represent a targeted, short-term solution. The bloc also plans to propose a more comprehensive, longer-term approach that will focus on a digital permanent establishment.
The scope of the planned tax would cover companies offering services such as advertising or the sale of user data, according to the draft prepared by the EU’s executive arm. It would also cover services provided by multi-sided digital platforms, which let users find and interact with each other and where users supply goods and services directly to each other.
The levy would cover companies that have annual worldwide total revenue exceeding 750 million euros ($920 million) and total taxable annual revenue from offering digital services in the EU above 50 million euros, according to the draft. The parameters may change until the proposal is approved.
The levy, which would be charged annually based on gross revenues, would be at a single rate across the EU of 3 percent, according to the draft proposal, although the rate, too, could change in the final version. Earlier drafts envisaged the rate somewhere between 1 percent and 5 percent.
The commission’s proposal comes as traditional taxation practices have so far failed to capture business proceeds from an industry where value-added tends to be virtual rather than material and digital companies have sought to take advantage of loopholes created by uncoordinated European regulation.
Even as national governments accept that the current taxation system needs to be altered, the path forward is fraught with difficulties, with some countries warning that a new levy could discourage digital use and push customers to products outside of Europe.
Any tax proposal will need the unanimous approval of all 28 current members of the EU before turning into law, so one country alone could block it.
Other countries have argued that discussions and decisions on this issue should be tackled at a global level and with the help of the Organisation for Economic Cooperation and Development, a group that advises its 35 members on tax policy.
But a report by the OECD published on March 16 indicated that there is still no global consensus on how best to proceed with the taxation of the digital economy or on the merits of an interim solution.