The European Commission is turning to the public to help it decide on a fairer and “growth-friendly” tax regime for multinational technology companies operating in the European Union.
The commission wants binding legislative proposals for “unitary tax” that would be levied on a share of tech companies’ global profits, divided up between the EU countries where they operate.
The rationale for this is that it could remove the incentive for multinationals to set up their headquarters or shell companies in low or no-tax jurisdictions.
“The current tax framework does not fit with modern realities. It was designed in a pre-computer age and cannot capture activities which are increasingly based on intangible assets and data,” the European Commission said in an announcement.
“As a result, there is the risk of shrinking tax bases for Member States, competitive distortions for businesses, and obstacles for innovative companies.”
The commission is also contemplating changing the principle of corporate establishment, so that companies could be taxed when they have a “digital” presence in a country.
In the short term, EU states could impose a tax on revenues from “digital activities” or services, such as the sale of online ads. They could also withhold tax on digital payments or a “digital transaction tax” levied on companies selling consumers’ personal data.
The European Commission has additionally announced opening its investigation into whether a UK tax exemption for multinationals amounts to a breach of EU state aid rules.
The UK government introduced an exemption to its Controlled Foreign Company (CFC) rules, which was created to stop companies from shifting untaxed profits to low or no-tax jurisdictions. The CFC rules allow UK tax authorities to reallocate all profits artificially shifted to an offshore subsidiary back to the UK parent company.
However, the Group Financing Exemption that was introduced means that certain financing income received by a company’s offshore subsidiary will not be reallocated to the UK.
“Thus, a multinational active in the UK can provide financing to a foreign group company via an offshore subsidiary,” the European Commission said in an announcement.
“Due to the exemption, it pays little or even no tax on the profits from these transactions, because: the offshore subsidiary pays little or no tax on the financing income in the country where it is based; and the offshore subsidiary’s financing income is also not (or only partially) reallocated to the UK for taxation due to the exemption.”
Companies such as Apple, Amazon, Facebook, and Google have come under scrutiny in the last few years for allegedly paying too little tax by establishing shell companies in low or no-tax countries such as Luxembourg and Ireland. This has allowed companies to report its Europe-wide profits at tax rates of well below 1 percent in some cases.
After a two-year investigation, the European Commission declared in August 2016 that tax arrangements between Apple and Ireland, originally established in 1991, allowed the company to pay “substantially less tax” than rival companies, and were therefore illegal under state aid rules.
The commission concluded that Apple had used two shell companies incorporated in Ireland so that it could report its Europe-wide profits at effective rates well below 1 percent, at one point paying a tax rate of just 0.005 percent.
As a result, Ireland was ordered to recover €13 billion in back taxes from Apple, which it is yet to fulfil.
In its legal submission against the EU’s ruling, the Irish Department of Finance claimed that it’s not only legal to levy far less tax on profits imposed by competitors, but that it’s the whole point of Ireland’s sales pitch to foreign investors.
Apple is also appealing the case.
The European Commission also ordered Amazon to pay about €250 million in taxes to Luxembourg, though the exact amount of tax to be repaid will need to be calculated by Luxembourg authorities.
According to the commission, Amazon received illegal tax advantages between 2006 and 2014 in Luxembourg without any “valid justification”. It concluded that the online retail giant had transferred a large portion of its profits from a company that was subject to tax in Luxembourg to a shell company it incorporated in the country that was not subject to the same tax obligations.
“In fact, the ruling enabled Amazon to avoid taxation on three quarters of the profits it made from all Amazon sales in the EU,” Vestager said.
“In other words, Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules. This is illegal under EU state aid rules. Member states cannot give selective tax benefits to multinational groups that are not available to others.”
Amazon, which is considering an appeal, said in a statement that it does not believe it received any special treatment from Luxembourg, adding that it paid tax “in full accordance with both Luxembourg and international tax law”.
In May, Google agreed to pay €306 million in back taxes to Italy and Ireland to end a criminal investigation into whether the company avoided paying the full amount on its revenues for more than a decade, Italian tax officials confirmed on Thursday.
The agreement resolves multiple disputes including a criminal probe that saw Milan prosecutors accuse Google of generating revenues of €1 billion in Italy and Ireland between 2009 and 2013.
The sum also settles other disputes for the tax years 2002-2006 and 2014-2015.
Tax officials said the settlement also launches a process to determine Google’s proper taxation level in Italy going forward.
Then in July, the European Parliament passed a directive requiring big multinationals to report tax and financial data separately in all countries where they operate in a bid to tackle tax avoidance and profit shifting to countries with lower tax rates.
However, the requirements need approval from the EU member states in the coming months, and would then need to be instituted into national law in each country within a year.
EU countries lose between €50 billion and €70 billion in revenues every year because of tax avoidance, Vice President of the European Commission Valdis Dombrovskis told lawmakers previously.
The new measure would require firms with activities in the EU and an annual turnover of at least €750 million to disclose data such as profits, revenues, taxes paid, and number of employees for each country where they operate.
Currently, multinationals disclose their operations in one consolidated report.