Author(s): Raghu Gopal
Last Wednesday, the European Commission proposed revamping the way technology companies are taxed. With the goal of curbing tax avoidance in the EU, the proposal outlines wide-ranging changes. The commission is attempting to better align rules with the modern economy, saying it wants to ensure that digital business activities are "taxed in a fair and growth-friendly way in the European Union".
The commission is considered the world's most prominent regulator of technology and digital services thanks to initiatives like its new privacy regime, the General Data Protection Regulation. Officials in other parts of the world may increasingly take their cue from the commission on how to regulate the technology industry.
Under the new approach, a company's revenues, rather than its profits, would be taxed in the countries where they're generated. The commission says that so-called "profit-shifting" allows some organisations to use regional offices in low-tax countries to reduce the sums they pay. The new rules would ensure that online companies contribute to public finances at the same level as traditional bricks-and-mortar businesses.
According to the commission, technology companies often employ profit-shifting techniques to lessen tax burdens. Officials estimate that digital businesses in the EU currently pay an average effective tax rate of just 9.5 percent, compared with 23.3 percent for companies operating physical stores.
The new measures gain prominence in the wake of recent revelations about alleged mishandling of user data involving a data analytics firm and Facebook, although this is completely separate from the tax regime (see Instant Insight: Facebook Reels from Cambridge Analytica Scandal). In the past, the commission has investigated or penalised companies including Amazon, Apple, Google and Qualcomm for data or tax infringements. Under mounting pressure, regulators in Europe and the US are expected to take a stringent view over the misuse of personal data, tax avoidance and antitrust violations. The regulatory environment could be in for a change for many digital companies, and a long list of countries is watching the current developments very carefully.
However, there's considerable disagreement about how much change is needed. The commission's plans may never reach fruition, as EU member states have to approve them. But policymakers within and outside the EU largely agree that a revamp is necessary to make global companies, whether digital or not, pay their fair share of tax in each country.
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