By Mark Fairlie

Earlier this week, the European Commission unveiled new plans to get US tech giants to pay more tax in Europe. If approved, some of the world’s largest technology companies could be required to pay as much as 3% tax on their turnover from the EU.

Tech giants paying too little tax in Europe

The change has come following criticisms from the European Commission that large tech companies based in the US are getting away with paying only a small amount of tax.

Under current rules, there is a loophole which means digital companies only pay tax in the countries in which they have a physical presence. That means, even if they are providing services to the said country and making a profit from it, they only need to pay tax if they have a physical office or store there.

Pierre Moscovici, EU economics affairs commissioner, stated that the “current legal vacuum is creating a serious shortfall in the public revenue of our member states”. Where traditional companies are charged an average tax rate of 23.3%, digital firms currently only pay 9.5% in the EU.

The new changes are set to change this, meaning tech companies will be required to pay taxes everywhere that they operate; just like a non-digital business would.

It is thought the proposal would affect much larger businesses with more than 100,000 per country, and those making more than over €7 million euros in annual revenue. However, it was also noted that the tax would only apply to certain streams of online revenue, like advertising on social media and search engines, e-commerce, and the sale of user data.

European Commission: ‘Digital tax’ blow to hit tech giants across Europe

The rules will specifically target big US firms in the EU, such as Facebook, Uber, Apple and Amazon, with annual global revenues over €750m and taxable revenue in the EU of more than €50m.

The commission suggested that these companies with significant online revenues should pay at least a 3% tax on their turnover; generating around €5bn – or £4.4bn – in taxes.

“Appropriate tax in the digital economy a major global challenge”

In order for this EU tax reform to be passed, it must be approved by the European Commission and the 28 EU countries. There are currently mixed feelings on the subject, with countries like Ireland and Luxembourg where many of these US companies are based unhappy with the proposals. For the plans to go ahead, however, there needs to be backing from all member states before it can become law.

“Being able to appropriately tax the companies operating in the digital economy is a major global challenge,” the European Commission said. “We now look forward to constructive discussions in the Council with a view to finding agreement as soon as possible.”

The digital taxation proposal will serve as a two-part plan; initially implementing revenue tax for tech firms, then setting out plans for long-term reforms to eventually tax all digital companies based on their sales rather than their physical location.

“Digitalisation brings countless benefits and opportunities. But it also requires adjustments to our traditional rules and systems,” said Valdis Dombrovskis, the commission’s vice president for the Euro and Social Dialogue, in a statement.

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