How to introduce an effective digital tax

DIGITAL businesses have become a lucrative segment of the economy, and an increasing number of nations have set their sights on enjoying part of the spoils of these digital firms.

Governments across the world – including Malaysia – are looking at introducing the “digital tax”, which will be imposed on technology companies and e-commerce players.

The European Union (EU) is inching closer to introducing a digital tax on technology giants such as Google, Amazon and Facebook, likely by year-end.

Following claims that large digital companies are involved in tax avoidance and pay a lesser effec- tive tax rate as compared to bricksand-mortar businesses, the EU’s tax deal is expected to resolve such concerns.

Large tech firms such as Facebook, Google and Amazon often manage to avoid paying taxes in many countries, mainly due to the fact that they have no large physical presence in those nations.

Usually, these digital firms declare their profits largely in the country their headquarters are based, causing other countries to lose potential tax revenue.

If the digital tax is approved by the EU members, then it will likely raise about £4.4bil (RM24bil) annually across Europe beginning 2019.

The European Commission has proposed to impose a 3% levy on the revenues of digital businesses with a total annual revenue of over €

750mil (RM3.6bil) and a yearly EU € taxable revenue of 50mil (RM240mil).

Any large tech company will be liable for tax if it makes money from digital advertising in a country or user data, regardless of its physical business presence.

While the EU’s two major economies, Germany and France, rush to finalise the tax deal by end-2018, several quarters have voiced their opposition to the proposed digital tax.

It has been reported that some players in the digital sector have criticised the tax plan, pointing out that digital firms may end up being taxed twice.

Meanwhile, on Oct 10, the BBC said that Ireland, the Czech Republic, Sweden and Finland had raised concerns that an EU tax could breach international rules on equal treatment of companies across the world.

In an interview with the BBC, the European Commission head of tax Pierre Moscovici said the proposed digital tax was making good progress.

However, he cautioned that if the EU members were unable to finalise the deal by the end of the year, then the process might only be reconsidered by end-2019, mainly due to the European Parliament elections next year and the appointment of new commissioners, among others.

Moscovici said the EU members’ corporate tax system had itself to blame for the tax avoidance of the large tech companies.

“It is not their fault. It is our fault. We have a tax system based on physical presence.

“We need to reflect on digital presence.

“If you compare all businesses, 23% is the average corporate tax rate. For the Internet, it is something like 9%. This is a problem of a level playing field,” said Moscovici.