Digital business in Europe is increasingly on the rise, while current tax rules are not keeping pace with digital progress. As a result, they are no longer relevant to today’s situation, as companies rely heavily on intangible assets, data and automation to facilitate cross-border online trading without a physical presence. In 2018, digital companies were treated more favorably than traditional ones, as their tax rate was as much as half lower than the tax rate of traditional companies. The current tax rules do not regulate digital business in a uniform way. As a result, some Member States are looking for unilateral solutions to generate fiscal revenues from digital activity.
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Digital business – special features
International regulations are flawed and allow new tax gaps to emerge in the single market. This also jeopardizes the EU’s competitiveness and the sustainability of Member States’ budgets. As early as 2017, EU leaders recognized digital business as an area in dire need of reform. Since then, they want to establish an efficient and fair tax system that will be suitable for modern digital business.
The central focus of their call for reform was precisely the need to ensure that fair taxes are paid, while ensuring a level playing field for businesses. To this end, only a year later, they adopted two legislative proposals for implementation. The first relates to the rules on corporate taxation. Thus, profits would be recorded and taxed where companies have important contacts with users through digital channels.
The second proposal relates to a tax on digital services, which Member States should introduce and charge for certain digital revenue-generating activities in the EU. Such revenues include, in particular, revenues from the sale of online advertising space, digital brokerage or the sale of data based on user information.
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Who should the new tax rules apply to?
Such taxpayers would only include companies whose digital business exceeds 750 million or whose taxable annual revenues exceed 50 million generated by the company in the EU. The proposed tax rate is 3 percent of total revenue. Member States could thus generate – according to rough estimates – around 5 billion in tax revenue a year.
European Commission advocates »one-stop shop« approach with digital business
The European Commission’s proposal also provides for cooperation between Member States in the form of a “one-stop shop”. This allows taxpayers a single point to meet all administrative obligations with the new tax (eg identification, reporting, payment). At the same time, taxpayers must be able to deduct digital business tax from corporation tax in order to avoid double taxation.
Digital business, and especially these types of technologies, are radically changing our world. This also has a significant effect on tax systems. Therefore, the EU’s digital single market needs a modern and stable framework in order for digital business to foster innovation, eliminate market fragmentation and enable all actors to take advantage of market dynamics under fair and balanced conditions.
Proposals for new tax rules for digital business are thus meant for companies operating on online platforms. They are intended primarily to equalize their position, regardless of business seat. At the same time, curbing the challenges that arise for existing tax systems. Thus, the new regulation intends to prevent corporate tax evasion. Especially those who are positioned outside the EU, but create added value in this territory related to digital business.
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