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The European Union’s executive arm has proposed an unusual new tax: a levy on the revenue (not the profit) of technology companies. Many EU countries say the tech industry isn’t paying its fair share to public coffers, and the effort to crack down on tax-avoidance schemes has led to large bills delivered in recent years to Apple Inc. and Inc. The idea behind the new tax is to focus on where tech users are based, rather than where a company chooses to place its European headquarters.

1. How exactly would this tax work?

If Facebook sold an ad based on its users in Brussels, say, it would pay the tax in Belgium. Under the proposed plan, the tax rate would be 3 percent, a level which could yield around 5 billion euros in new revenue per year. The levy would be an interim measure until a more comprehensive, longer-term solution proposed by the European Commission was in place, although negotiations on that could take a while.

2. Isn’t this more than an EU issue?

It is, and EU leaders would prefer a global approach, but several countries have already said they are prepared to move alone until work at an international level picks up. The new tax is meant to be an interim step as the EU works on a better way to tax tech companies’ corporate earnings.

3. Who would be affected?

According to the commission’s plan, the tax would cover companies that offer advertising services or that sell user data, such as Google parent Alphabet Inc. and Facebook Inc.; companies that let users find and interact with each other or supply goods and services directly to each other, such as Airbnb Inc. and Uber Technologies Inc. Companies that fall within the scope of the tax are those with annual worldwide revenue above 750 million euros ($925 million) and sales from taxable digital services within the EU above 50 million euros.

4. When will the tax take effect?

Not immediately. Any tax proposal needs the unanimous approval of all 28 EU members, meaning that a single dissenting country could block it. EU leaders will hold a first discussion on the plan at a March 22-23 summit, and the bloc’s finance ministers will talk about it when they meet in Bulgaria next month. The entire negotiation-and-approval process could take months, or even years.

5. Who’s not yet on board?

While all EU governments agree the current corporate tax system needs to change, some countries warn that a new tax on digital revenue could push customers to use products outside the EU’s boundaries or discourage digital use altogether. Ireland is among several countries that have argued that tax issues should be tackled globally and with the help of the Organization for Economic Cooperation and Development, which advises 35 developed countries on tax policy. But the OECD, in a report released on March 16, indicated that there is still no global consensus on how best to tax digital services.

6. Why is it so hard to tax the tech giants?

Europe’s current tax rules were designed for the traditional economy and don’t fully capture activities based on data and intangible assets, such as intellectual property. This means traditional tax systems so far have failed to capture activities where value added tends to be virtual, rather than material. And digital companies have sought to take advantage of loopholes created by uncoordinated European regulation. These loopholes allowed tech companies to re-route profits to low-tax jurisdictions, such as Bermuda, which has no corporate income tax, or Ireland, which worked out the special deal with Apple. According to the European Commission, global technology companies pay a 9.5 percent average tax rate compared with 23.2 percent for traditional firms.

7. Is this a tax aimed at U.S. tech companies?

The EU insists it isn’t, though many of the affected tech giants are U.S. companies. EU tax chief Pierre Moscovici said 120 to 150 companies, many of which are not American, would fall within the scope of the levy. “This is not an anti-U.S. tax,” Moscovici said, adding that the commission’s “proposal does not target any company or any country.”

8. What do the companies say?

Companies have been cautioning against the EU’s digital tax proposals — especially the interim levy — saying they could harm the business environment. The Information Technology Industry Council, which represents companies including Amazon, Apple and Facebook, said in a press release that the commission’s proposal “harms business certainty in Europe and would chill trade and investment from companies across the globe.” U.S. Treasury Secretary Mnuchin echoed their position last week, saying the U.S. opposes singling out digital companies, the source of many new jobs and much of the U.S.’s economic growth.

9. What might the EU’s long-term approach look like?

For the longer-term fix, the commission wants to change EU corporate tax rules so that tech companies can be taxed where value was created and profits were made, and not just where they have a physical presence. This could take time, the commission says, which is why (along with concern about country-by-country unilateral measures) an interim fix is being proposed. Under the long-term proposal, companies would have a significant digital presence and, thus would be covered by the new rules, if they meet one of three criteria: Having more than 7 million euros in annual revenues from digital services; more than 100,000 users per year; or more than 3,000 business contracts for digital services created in a year.

The Reference Shelf

  • A Bloomberg QuickTake explains the global crackdown on profit shifting.
  • The Organization for Economic Cooperation and Development’s report on digital taxation.
  • The latest on Apple’s tax arrears in Ireland.
  • How everyone is attacking big tech: a scorecard.
  • A fair, permanent solution would be better than this quick-and-dirty one, writes Bloomberg View’s Leonid Bershidsky.






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