Europe Just Dropped a Major Tax Bombshell to Get U.S. Tech Giants to Pay Up

March 21, 2018, 12:32 PM UTC

The European Commission wants to see big tech firms pay a 3% tax on some of their revenues. This is a major break from the traditional way of calculating tax based on profits.

The European Union’s executive body is frustrated with the relatively low corporate taxes paid by firms such as Facebook (FB) and Amazon, and individual EU countries are frustrated at seeing overseas firms take business from local rivals while booking their revenues elsewhere.

Amazon (AMZN), which has irked regulators with a favorable tax deal in its Luxembourg base, paid a mere €16.5 million ($20.3 million) on its 2016 European revenues of €21.6 billion.

In the long term, the Commission wants to see the EU’s corporate tax rules reformed so that companies are taxed on their profits based on the location of their customers and users, rather than the location of their headquarters. Digital companies would fall into the net if they make €7 million or more each year in the relevant country.

In the meantime, it wants to introduce an interim tax based on revenues “created from certain digital activities which escape the current tax framework entirely.” These activities include the sale of online advertising space, the supply of platforms connecting users and suppliers of services and goods (probably meaning companies such as Airbnb and Amazon), and the sale of data derived from user-provided information.

The proposed interim tax targets companies that have annual taxable EU revenues above €50 million, and global annual revenues above €750 million.

“Digital profits in Europe exist but are taxed very little or not at all,” said the European commissioner for taxation, Pierre Moscovici, who blamed traditional rules designed for companies with a physical presence in the countries where they offer their services.

France and Germany have been among the prime movers behind Wednesday’s long-anticipated move, although there has been some tension between the two countries’ administrations on what the new rules should look like.

Germany has been keen on the idea of taxing the online giants proportionately to the location of their customers and operations, but France pushed to go further with a tax on revenues. The German government has reportedly been worried that a revenue tax could prompt American retaliation, that could hit the German auto sector.

Trade lobbyists were not pleased by the new proposal.

“The proposed turnover tax aimed at online platforms is discriminatory and ignores the global consensus that the so-called ‘digital economy’ should not be singled out,” said Christian Borggreen, vice president of tech trade association CCIA Europe. “We encourage the EU to seek international tax reform through the OECD rather than pursuing discriminatory, unilateral actions with risks to Europe’s digital economy and international trade relations.”

The European Commission’s proposals won’t enter into force until the European Parliament and member states agree, which is far from certain. Ireland in particular is likely to be a vocal opponent of the move, as its low tax rates have encouraged companies such as Facebook and Apple (AAPL) to locate their international headquarters there.

Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.

Read More

Artificial IntelligenceCryptocurrencyMetaverseCybersecurityTech Forward