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EU unveils plans for 3% turnover tax for tech giants

The European Commission has unveiled plans for a 3% tax on the revenues of tech companies, as it clamps down on firms that shift profits to low-tax jurisdictions.

The proposed tax will be levied on earnings from online advertising, impacting Google Inc. and Facebook Inc., as well as on earnings from subscriber fees charged by service providers such as Apple Inc. and Amazon.com Inc., and from the sale of data generated from user-provided information to third parties.

The tax, to be imposed on online companies with an annual global turnover of more than €750 million and EU-generated revenues of €50 million, could generate about €5 billion per year for EU member states, according to a March 21 statement from the EU's executive body.

The proposal, which is likely to encounter resistance from the U.S., is the latest development in a range of Europe-wide efforts to tackle corporate tax avoidance. Under current EU rules, companies are allowed to base their headquarters in European countries with lower tax rates, thereby paying the local tax rate on profits rather than the tax of each European market they operate in.

The commission further announced a reform of existing corporate tax rules, which would allow EU member states to tax profits that are generated in their territory even if the company does not a have physical presence there. The new rules would apply to online companies that have an annual revenue threshold of €7 million in an EU member state, those with more than 100,000 users in a member state in a year, or those with more than 3,000 business contracts within a year.

EU Commissioner Pierre Moscovici explained that the new framework was necessary because "our pre-internet rules do not allow our member states to tax digital companies operating in Europe when they have little or no physical presence here."

The proposal will be submitted to the EU Council of Ministers and to the European Parliament for consultation. France, Italy, Germany and Spain are expected to back the plans as they have been pushing for tax reforms in the tech sector for years.

However, the proposed framework is far from a done deal, according to London-based Imran Choudhary, director for technology at market research company GfK, as he pointed out in an interview that all EU member states have to agree to the legislation.

It is likely that low-tax jurisdictions such as Ireland and Luxembourg may delay or even frustrate the commission's legislative efforts.

German business consultant and app developer Florian Mueller said the proposed tax would not make the EU any more competitive.

"[It] could lead to a full-blown trade war with the U.S. and would definitely harm European companies and consumers in the end," he said in an interview.

John O'Connell, chief executive at TaxPayers' Alliance, a British advocacy group, said the EU's plans may make it more expensive for tech companies to invest in the EU.

"What is being proposed is a fudge that will meet with stiff resistance from smaller, more business-friendly member states like Ireland," O'Connell said.

The tax proposal is expected to force tech companies such as Alphabet Inc. unit Google, Facebook and Amazon to open up their tax affairs across the EU. U.S. Treasury Secretary Steven Mnuchin earlier opposed the proposed tax ideas, which he said would be harmful and redundant on the part of mostly U.S.-based digital businesses.

Richard Murphy, on the other hand, does think it is right for governments to intervene. Murphy, who runs Tax Research UK, said the issue is about more than just paying tax.

"There is a reason for intervening: markets are being distorted [by tech companies]," he said.

At present, Apple's European head office is in Cork, Ireland, while Facebook's European business is based in Dublin. Google and Amazon European operations are headquartered in Dublin and Luxembourg, respectively.

Aside from the European Commission, the Organisation for Economic Co-operation and Development is trying to harmonize tax proposals from various governments, in order to ease the harm they could cause to companies' financial positions. The OECD will present a report on the matter to the G-20 finance ministers in April.

When approached by S&P Global Market Intelligence, a spokesperson for Facebook declined to comment and Google did not respond to any requests for comment.