EU: Tech firms pay half the tax of traditional businesses

EU flag in front of building

The European Commission has revealed that technology companies pay less than half the tax that traditional business pay to operate in the EU.

Within the EU, businesses with an international reach typically pay a 10.1% tax rate while traditional companies pay 23.3%, due largely to the difficulty of taxing digital assets that are typically internet based. This is particularly important given that more than half of the world's top 20 companies are technology-based.

This new report comes just two weeks after finance ministers from France, Germany, Italy, and Spain penned a letter to the EU Commission. The letter requested taxes on the revenues of tech giants' rather than just their profits, as well as an "equalization tax" which would make companies pay corporate tax in countries where they have earned revenue.

The discussion of taxation of international digital businesses is not a new one. In July, Apple found itself in trouble with the European Commission which stated that because Apple's corporate tax on its European profits fell dramatically from 1% in 2003 to 0.005% in 2014, Apple needed to pay 13 billion in unpaid taxes to the Republic of Ireland.

To prevent similar cases in the future, the European Commission plans to "act now to ensure that businesses in the digital economy pay their fair share of tax" through a tax reformation. According to the report, members of the EU, have agreed "to a series of ambitious new rules to tackle aggressive tax planning and increase tax transparency."

The report states that "a common EU approach will strengthen our position in the international discussions to push for progress on this issue and the development of meaningful, multilateral solutions." The Commission's idea is to use the Common Consolidated Corporate Tax Base (CCCTB), the EU's regulations for the calculation of taxable profits, as a guide for revising the rules for the recording of profits of large groups. Once implemented, this should make it easier to see the flow of revenue, assets and labour across businesses with intangible assets, such as technology companies.

As it is now, tax is based heavily on physical presence, however digital companies do not need to necessarily have physical offices in a region to operate their business. Instead, the new reforms would see taxation based on the number of users, the amount of data collected, the local domain name or the digital transaction revenue.

As a short term solution, the Commission is considering a tax on turnover, a levy on revenue from digital services, and withholding tax on digital transactions. These solutions would protect direct and indirect tax bases for Member States; however, there is some work to be done before the proposals are usable with tech companies operating in the Single Market.

Although there is no set date for these changes, a preliminary report will be published in early 2018 which will set out policy options to the G20. Ultimately the hope is to come to an agreement on "the most fair, efficient and permanent solution."