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Trading  | March 22, 2018

US tech firms will no longer be able to choose the destination with the lowest tax rate for their European headquarters, if a widely expected European Commission proposal is approved. Beginning Wednesday, the European Commission has proposed new tax rules that would require US tech firms to pay taxes in the countries or regions where they generate value – not just where their headquarters are located, according to the Wall Street Journal.

Per Bloomberg, firms including Alphabet Inc., Twitter Inc. and Facebook Inc. could face a 3% tax on gross revenue gleaned from users in a given region.

EU officials have been ratcheting up the pressure on US tech giants over the past few years. Late last year, EU Competition Commissioner Margrethe Vestager slapped Amazon with a 250 million euro fine after ruling that Luxembourg, where Amazon’s European headquarters is based, failed to tax the company on three-quarters of its revenue, in accordance with state-aid rules. A year earlier, Vestager scored another victory, this time against Apple, by accusing Ireland of under-taxing the consumer electronics maker.


US Treasury Secretary Steven Mnuchin has warned European leaders that the US “firmly opposes” legislative proposals that target digital companies, though he didn’t specifically name the EU.

“Imposing new and redundant tax burdens would inhibit growth and ultimately harm workers and consumers,” Mnuchin said.

According to WSJ, officials had debated postponing the proposals so as not to appear like they were meant in retaliation. Officials clarified that the rules are meant to target all tech companies, though the provisions of the proposals suggest US tech firms are likely to be the worst hit.

EU tax chief Pierre Moscovici told reporters in Brussels on Wednesday that the proposed levy wasn’t aimed at the U.S. nor was it meant to target specific nations or companies.

“Digitalization brings countless benefits and opportunities. But it also requires adjustments to our traditional rules and systems,” said European Commission Vice President Valdis Dombrovskis, who leads financial-services policy work at the EU. “The amount of profits currently going untaxed is unacceptable.”

As BBG explains, the new taxes will apply to sales where users play a major role in value creation. It would also cover services provided by multi-sided digital platforms, which let users find and interact with each other and where users supply goods and services directly to each other. The levy would be charged annually and at a single rate across the EU of 3 percent, a level which would yield around 5 billion euros ($6.1 billion) a year. Companies affected by these new rules would meet one of three criteria: Having more than 7 million euros in annual revenues from digital services in a given country; having more than 100,000 users per year in that country; or having more than 3,000 business contracts for digital services created in a year in that country.

In addition, the law would only apply to companies earning more than 750 million euros ($918 million) in global revenue.

On average, the EU estimates that tech companies pay around 9.5% in tax on their profit on the continent, compared with 23.2% for traditional industries, though tech lobbyists dispute that figure.

Taxes will apply even if a firm doesn’t have a physical presence in the region where the taxes are being levied – the only thing that matters is where the “value” from its revenues was created.

If passed, the proposal will function as a stopgap until the Commission can create a broader framework that would empower member countries to levy their own taxes. The proposal will need unanimous consent from all 28 EU member states before it can become law. So one country alone could block it.

Other countries have argued that discussions and decisions on this issue should be tackled at a global level and with the help of the Organization for Economic Cooperation and Development, a group that advises its 35 members on tax policy, per BBG

Smaller countries (many of which are tax havens) complained that the new rules would disadvantage them and favor larger states.

Furthermore, online media, streaming services like Netflix, online gaming, cloud computing or IT services would instead be exempt from the tax, Reuters reported.

‘How to tax digital companies’ is destined to be one of the most fraught elements of figuring out how best to regulate the digital economy… all of which plays into George Soros’ master plan from Davos.

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