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EU proposes digital tax to put an end to big tech tax avoidance

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The European Commission has proposed a 3 per cent tax on large digital companies which will be applied depending on where their users are based.

The tax will affect only the largest companies; those making more than €750m annually, with taxable EU revenues of at least €50m. According to the Commission, these leading digital companies – with average revenue growth of 14 per cent – currently face an effective tax rate of just 9.5 per cent, less than half that of conventional companies. These levels of taxation are “unacceptable”, said Valdis Dombrovskis, Vice President of the Commission.

It has been suggested that tax should be 3 per cent of their turnover within the EU, collected in the country where the users are located, which could raise an estimated €5bn. 120 to 150 companies – including Google, Facebook, Amazon and Spotify – are expected to be affected by the charge, half of which are American, and a third of which are European. Media and telecommunications companies will not be affected.

It is designed to target activities in which users are vital to value creation, such as through data selling or online advertising.

“This is neither a [Google, Apple, Facebook and Amazon] attack, nor an anti-US attack proposal that will target any company or any country,” Pierre Moscovici, the EU Tax Commissioner, told a press conference.

The proposal has been supported by Emmanuel Macron, the French President, although Leo Varadkar, the Irish Prime Minister, described the proposal as “ill judged” and urged the Commission to wait for international tax policies planned by the OECD. Tax reforms require backing of all 28 member states to pass into law.

The OECD aims to have settled on a system for deciding where a company should be taxable by 2020.

The tax is a proposed interim measure before a more comprehensive means of taxing corporations across the bloc can be implemented. Larger EU member states, including the UK, have criticised some tech giants for routing their profits through smaller member states with lighter corporate taxation, such as Luxembourg and Ireland. For instance, Facebook paid just £5.1m in corporation tax in the UK during the last tax year, despite revenues nearly quadrupling thanks to a boost in ad sales. Campaigners have argued that routing its profits through Ireland, where it has a headquarters, has enabled Facebook to face far lower corporation tax. In December 2017, Facebook stated that it will move to end the practice.

European crackdowns on large tech companies – such as eye-watering fines applied to Apple, Google and Amazon by EU antitrust authorities – have resulted in the Commission being forced to deny claims that it is deliberately targeting Silicon Valley.

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