In recent weeks the European Commission has been discussing proposals to raise taxes on digital firms that operate within the European Union. The move is aimed mostly at Google, Apple, Facebook, and Amazon. A number of proposals have been introduced, including revisiting the rules for permanent establishment, tax harmonization to a common corporate tax base, and instituting a turnover tax. Any proposal is likely to receive backlash from low-tax EU member states, eventually leading to procedural hurdles in adopting EU law.


Under current rules, corporations must have a physical presence in a country in order to be subject to that country’s taxing authority. This includes a store-front, warehouse, or processing center. Major digital firms are able to locate in one country and sell goods to consumers in other countries remotely, through the internet. These firms will be subject to corporate tax where they are based (often low tax countries) and not subject to corporate tax in foreign countries where consumers are buying their goods. To counter the incentive for corporations to locate in low tax countries, the EU has proposed revisiting the rules on permanent establishment. New rules would likely move away from requiring a physical presence in the country and instead rely on the sale of goods as a basis for companies being subject to taxation, or a “digital” presence.


Changing the language to redefine permanent establishment is seen as a long-term solution by the EU. In the meantime, more short-term proposals are aimed to stop-gap the loss of tax revenues faced by many higher tax countries. One such proposal is the establishment of a common corporate tax base across EU member states. This would establish a common set of tax rules across the EU that could address issues of permanent establishment and other factors that influence where countries choose to locate their headquarters. This scheme of tax harmonization could ultimately lead to higher rates for many countries, without the vote of their respective legislatures. This imposition of higher taxes through the supranational European Union violates free market principles, as I’ve discussed here


Another EU proposal is an equalization tax, or turnover tax. This would be a tax on all untaxed or insufficiently taxed income generated from the internet-based business activities of a firm. Traditionally, firms are taxed on their profits, which is their revenue minus costs. This turnover tax would abandon this concept of when to apply tax, and have it applied directly on revenues. This puts smaller firms and firms with smaller margins in peril, as taxes irrespective of their profits could ultimately lead to the taxation of loss-making industries. 


Any proposal favored by the European Commission is likely to face stringent opposition from some EU member states. Countries such as Ireland, Malta, and Luxembourg have corporate income tax rates well below the EU average, and will oppose any measure that raises their rates or sees their ability to attract corporations decreased. EU tax law changes require the consent of all 28 member states. This unanimity requirement will be a fierce test of the divide between low tax member nations who wish to maintain their autonomy of their tax rates, and high tax member nations who seek to collect more in revenue from digital firms.