The European Commission has proposed rules to ensure that companies conducting business digitally in the European Union are paying their fair share of tax.

Under the proposed law, corporate tax rules would be amended so that profits are registered and taxed where businesses have “significant interaction” with users through digital channels. The proposals also call for an interim tax which would cover the main digital activities that are not yet captured by member states’ tax rules.

Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs said: “Our pre-Internet rules do not allow our Member States to tax digital companies operating in Europe when they have little or no physical presence here.”

According to the commission, certain businesses, such as the lucrative sale of user-generated data, fall outside of existing tax rules. Multinationals such as Amazon, Google and Facebook, in particular, have been on the commission’s radar as they generate huge profits without necessarily having a classic “bricks and mortar” presence.

Digital presence

Existing tax rules have been constructed to cater primarily for a “bricks and mortar” presence. Under the proposals, a digital platform would be deemed to have a “digital presence” and therefore be eligible to pay tax, according to a set of new criteria.

Under the new rules, if a company exceeds a threshold of €7m in annual revenues in an EU member state, has more than 100,000 users in a member state in a taxable year, and more than 3,000 business contracts for digital services created between the company and business users in a taxable year, then a company would have a “digital presence”.

The interim tax, meanwhile, would ensure that the EU has a seamless approach rather than a patchwork of measures that it said could damage the single market. It would apply chiefly to revenues from selling advertising space, digital intermediary activities allowing interaction between users, and the sale of data generated from user-provided information.

Global solution

The commission said it was in favour eventually of a global solution to the issue of taxation of digital business activities.

Valdis Dombrovskis, vice-president for the euro and social dialogue, said: “We would prefer rules agreed at the global level, including at the OECD [the Organisation for Economic Co-operation and Development]. But the amount of profits currently going untaxed is unacceptable.

“We need to urgently bring our tax rules into the 21st century by putting in place a new comprehensive and future-proof solution.”

The commission’s proposals are subject to approval by EU member states and the European Parliament.