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Summary

On November 5, 2018, EU finance ministers met to discuss the EC's proposal to implement a new 3% digital tax on online giants such as Facebook and Google. The member states remain divided on the rules, and many are looking to introduce national initiatives instead. The UK recently announced its own plans to introduce a 2% tax on digital revenues from big tech companies with over £500m ($641m) in turnover.

EU ministers still need to agree on the scope of online services that would be subject to a 3% revenue tax

The EU is aiming to reach a consensus on a new digital tax by December 2018. There is no majority in support of the new tax rules, but so far ministers have agreed definitions, tax collection, and administrative cooperation. Questions remain over the exact scope of services that would be subject to the tax. However, the proposal currently states that the rules would apply to activities that generate revenues from selling online advertising space from digital intermediary activities that allow users to interact with other users and that can facilitate the sale of goods and services between them, or from the sale of data generated from user-provided information. All member states already agree that the tax will only be a temporary measure until an agreement can be reached at the OECD level to create an international tax system for online services. Therefore, there will be a sunset clause incorporated into the new rules, at which point the regulation will expire. The existing taxation system does not capture business models that can make profit from digital services in a country without being physically present, and there have been calls for some time for this to be changed.

Back in March 2018, the EC originally outlined its proposal to increase the tax on digital services. As an interim measure, tech giants would pay a 3% levy on revenues generated from such services in the EU. Tax revenues would be collected by the member states where the users are located and would only apply to companies with total annual worldwide revenues of €750m ($856m) and EU revenues of €50m ($57m). In the longer term, EU member states were looking at the possibility of also taxing profits from the services if they exceed a predetermined threshold. However, since the original proposal was released, EU ministers have agreed to only focus on the proposal to tax revenues rather than taxing profits. The US government has described the plans as anticompetitive to US companies operating in Europe, as the vast majority of the businesses that will be affected are US based.

Individual member states are also exploring the possibility of implementing their own initiatives to levy a tax on online services, particularly if an agreement cannot be reached at the EU level. In the UK, the government has said that it is looking to introduce a 2% tax on the UK digital revenues of big tech companies with over £500m ($641m) in turnover from April 2020.

With an ever-expanding customer base, the OTT sector in particular has brought about considerable transformation to the communications sector. However, these providers continue to face less regulation than more traditional competitors. As OTTs are not restricted geographically, it can be challenging to regulate them, and some of the tech giants have been accused of not sufficiently contributing to the tax system in the countries they operate. OTT services utilize the networks of telcos without having to invest in spectrum or network infrastructure, while telcos face increased competition from OTTs while also being burdened with regulation and taxes. The EU's tax initiative is the first attempt to level the playing field in terms of EU-wide taxation.

Appendix

Further reading

"Tax reforms aimed at OTT players are a positive step toward leveling the playing field for telcos," GLB007-000048 (March 2018)

Author

Sarah McBride, Analyst, Regulation

sarah.mcbride@ovum.com

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