The European Commission — the executive arm of the European Union (EU) — unveiled plans Wednesday to tax companies where they actually generate business, rather than where they are headquartered.
The proposed changes to how digital businesses are taxed could substantially increase the amount such firms have to pay in taxes. It says those firms with significant online revenues should pay a 3 percent tax, but it would only apply to certain online revenue streams like the sale of user data or online advertising.
According to data from the European Commission, digital companies pay on average an effective tax rate of 9.5 percent — compared to 23.2 percent for traditional businesses.
"The digital revolution has overturned our economies and also shaken profoundly the way businesses create value today," Pierre Moscovici, the EU's commissioner for taxation said at a press conference on Wednesday, arguing that the current rules are outdated.
"The idea is to ensure equal treatment and fairer taxation," he said.
In more detail, the proposals include a "common EU solution" which would allow member states to tax profits that are generated in their territory, even if these companies do not have a physical presence there. But, a company would have to fulfill one of the following criteria: its annual revenues in a European country exceeds a 7 million euro ($8.6 million) threshold; it has more than 100,000 users in a taxable year; or over 3,000 business contracts for digital services are created between the company and its users in a taxable year.