The European Union is getting ready to take on the issue of revising tax laws for digital companies.
In a new agenda, the European Commission said the current decades-old tax framework among the EU’s 23-member states “does not fit in with modern realities,” and purportedly leaves digital companies with an effective tax rate estimated to be at least half of that levied against traditional companies, including brick-and-mortar retailers.
The commission added that digital companies can sometimes pay even less than half of the traditional tax rate, and said the current “patchwork unilateral measures by member states to address the problem threaten to create new obstacles and loopholes” in Europe, as it continues to move toward a “single market” defined by a set of cross-border laws and regulations.
Now, the commission is moving onto taxes for the online economy, which it says is in need of a “stable tax framework” that applies to digital business that “rely heavily on hard-to-value intangible assets, data and automation, which facilitate online trading across borders with no physical presence.
Companies such as Google, Facebook and Alibaba, all of which are growing in popularity in Europe, seem to fit the commission’s description, but the commission did not single out any specific companies as benefitting from Europe’s fragmented tax system.
Google is already facing a record 2.4 billion euro fine for allegedly using anti-competitive algorithms in its comparative shopping feature.
States in the U.S. are also grappling with how exactly to tax digital retailers, and a South Dakota lawsuit on the issue is likely to land in front of the U.S. Supreme Court.
The commission did point out that this year, more than half of the EU’s largest businesses by market capitalization are technology-driven companies and that between 2008 and 2016, revenue from the biggest e-commerce retailers grew by an annual average of 32 percent. The annual growth average for traditional retailers during the same period was 1 percent.
Digital companies are projected to keep growing by an average of 35 percent a year for at least the next decade, the commission added.
While the commission said that it’s “essential” for EU business to grasp the opportunities created by technological advances like virtual reality and the Internet of things, among others, it admitted “the challenge ahead is for Europe to seize swiftly all these digital opportunities to ensure Europe’s competitiveness, while ensuring fair taxation.”
The agenda is meant to serve as an outline of the digital tax issue in Europe, and only presented questions of “where to tax?” and “what to tax?” but the commission did say it would prefer an international policy, since digital companies are based and do business all over the world.
Early next year, the Organization for Economic Co-operation and Development, an intergovernmental group based in France focused on global economic development, is set to present an interim report on the taxation of digital businesses to the G20.
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