The European Union on Wednesday unveiled sweeping new legislative proposals to raise taxes on big technology companies, a move that risks angering U.S. officials when trans-Atlantic relations are already strained by an escalating trade spat.
The proposed taxes are among Europe’s most-aggressive measures to target the alleged excesses of a small cadre of tech superpowers, including Facebook Inc. and Alphabet Inc.’s Google, potentially adding hundreds of millions of euros to some tech firms’ tax bills. The U.S. warned last week against imposing tax measures that single out digital companies.
On Wednesday, the European Commission, the bloc’s executive body, proposed an additional tax at 3% of revenue from some digital activities offered by companies whose annual global revenue exceeds €750 million ($918 million). The tax would apply to services where users play an important role in creating value, such as selling online ad space, social media or platform services for ride hailing or food delivery.
Some U.S. tech giants rake in billions of euros via units in Europe, potentially exposing them to steep new taxes under the proposed new 3% levy on digital revenue.
*Amazon European HQ Unit: Amazon EU Sarl †Alphabet European HQ Unit: Google Ireland Ltd. ‡Facebook European HQ Unit: Facebook Ireland Ltd. Note: European revenue converted at €1 = $1.07 (2015) and €1 = $1.06 (2016)
Source: company filings
Those rules would expire once EU countries implement the commission’s proposal for long-term rules, which would tax profits companies make in countries where they have many users but no physical presence. A company would have a “taxable digital presence” in a given country if it meets certain criteria, like having more than €7 million in revenue or 100,000 users in the country in a year.
The proposals, however, face opposition from some EU countries, a stumbling block because EU tax legislation requires the unanimous support of member states to become law.
European officials, who have been working on the legislation since last year, argue that big American tech firms manage to use the current tax system to shift too much of their profit to lower-tax countries, underscoring the need for an update to tax rules that better account for online business models.
“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.”
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.
Still, the move risks provoking U.S. officials. Treasury Secretary Steven Mnuchin last week said the U.S. “firmly opposes” legislative proposals that target digital companies, without specifically naming the EU. “Imposing new and redundant tax burdens would inhibit growth and ultimately harm workers and consumers,” he said.
The EU’s proposed measures come as it butts heads with the U.S. over President Donald Trump’s planned tariffs on aluminum and steel. EU Trade Commissioner Cecilia Malmström is in Washington this week to urge top officials there to exempt the bloc from the tariffs, which are set to take effect Friday.
Commission officials had been heatedly deliberating over whether to postpone the tech-tax announcement so as to avoid giving the appearance that the measures are a retaliation against the U.S. over trade, according to people familiar with the matter.
Technology executives and lobbyists say they see the revenue tax as an overtly political effort to target big American tech companies. EU officials deny that the rules are designed to target any nationality, although U.S. tech giants are likely to be most affected by the proposed rules.
“It’s clearly politically motivated, and it’s clearly targeted on some big non-European platforms,” said Christian Borggreen, vice president for Europe at the U.S.-based Computer & Communications Industry Association, a lobby group that represents companies including Amazon.com Inc., Facebook and Google.
The commission says it is trying to prevent a patchwork of different legislation with the short-term tax on revenue since some national governments, including Italy, are already pressing ahead with their own rules.
European officials say that digital products rely increasingly on crunching millions of users’ data to generate value—for example, by targeting niche ads directly at users, or by combining millions of interactions to improve an app’s voice-recognition capabilities. European officials say that means value is generated where users are located—and the system should change so tax should be paid there, too.
If implemented, the new tax could total hundreds of millions of euros a year for some of the bigger companies. Google, for instance, reported €26.3 billion in 2016 revenue at its main unit in Ireland.
A spokesman for Google didn’t immediately respond to a request for comment.
However, it is unclear whether the proposals can muster the unanimous support from EU countries that it needs to become law.
Officials from some smaller EU states, which typically have lower corporate tax rates and house European headquarters for some big U.S. tech firms, have expressed concern that proposals based on the number of users will unfairly favor countries whose populations are bigger.
Companies could also deduct the revenue taxes from their corporate tax base, which could lower the amount collected by the headquarter countries.
The officials have also expressed skepticism that the short-term proposals would eventually expire, pointing to examples of other tax rules initially designed to be implemented for a short amount of time, but which have remained for decades.
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