Estonia pushes fair taxation plan for web giants in Europe

Estonia's Undersecretary for Tax, Dmitry Jegorov. [@dmitrijegorov/Twitter]

A precondition for making online companies such as Amazon and Google pay taxes where they are due is to affirm the principle of “virtual permanent establishment”, whereby digital firms pay taxes in countries where they have a “significant digital presence”, said EU presidency holder Estonia.

Estonia, which holds the rotating EU presidency, is proposing an overall reform of corporate taxation that would tax internet companies in the EU states where they make profits, regardless of their tax residence.

The European Union’s plans to raise more tax from major internet companies are more ambitious than the levy on turnover proposed by France, the EU presidency said, warning of the possible drawbacks of “quick fix” solutions.

France has proposed a tax on online giants’ turnover rather than on their profits. Germany, Italy and Spain have backed Paris on this idea.

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Taxation based on “virtual permanent establishment”

Both proposals are aimed at increasing the tax bills of web firms, preventing them from declaring their revenues only in EU states with low tax rates, like Ireland or Luxembourg.

The issue will be discussed by EU finance ministers at a meeting in Tallinn, the Estonian capital, on Saturday (16 September).

Although the aims coincide, the two proposals may clash.

A tax on turnover could hit loss-making companies, which usually are exempted from taxes, and may reduce the appetite for investment, the Estonian Undersecretary for Tax, Dmitri Jegorov, told Reuters.

He said such a tax would be “a quick fix”, rather than a structural solution to the problem of low taxation of the digital economy.

“Our level of ambition is much higher,” Jegorov said. He added that the precondition for long-term fairer taxation was to affirm the principle of “virtual permanent establishment”, whereby digital companies pay taxes in countries where they have a “significant digital presence”.

He did not give more details about the Estonian plans as political and technical talks on them have yet to be held.

The minister also stressed that the French and the Estonian plans were not incompatible and could be seen as different steps of the same strategy.

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Online retailers such as Amazon could come under tighter scrutiny and be forced to collect VAT from companies whose items they sell, according to new changes that EU member states made to a draft bill.

Equalisation tax

Despite divergences, pressure is growing to reach a compromise by the end of the year. Smaller EU states, usually reluctant to accept tax reforms, will need to be convinced. They hold a veto power over all tax legislation.

“We believe an equalisation tax could be an important step forward as part of a wider approach to deal with low taxation of the economy,” a spokesperson for France’s finance ministry said.

“That’s why this initiative should be seen as complementary to other initiatives being discussed at an EU and global level.”

The European Commission welcomed the debate.

“We trust that this momentum can be harnessed to drive forward our efforts to find solutions to the taxation of the digital economy,” a spokeswoman stated, adding that the overall aim is that “profits are taxed where the value is created”.

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