EU Preps Tax Crackdown on Silicon Valley

The European Union's executive arm said Thursday that it is ready to propose new tax taxes on digital companies like Facebook Inc. and Alphabet Inc.'s Google by next spring if there isn't "adequate global progress" toward a rewrite of corporate tax rules at an international level.

The bloc's executive arm, the European Commission, floated several options that it said could be rolled out in the short term to raise tax revenue on digital companies, which it contends declare too little profit in the region. While the commission said a global solution would be preferable, it added that it "stands ready" to propose legislation if major countries, including the U.S., can't make headway on new rules.

The threat of new tax legislation comes amid pressure from big EU countries including France and Germany, which have recently increased their push to change corporate tax rules at any level to capture what they say are billions of euros in lost revenue. Finance ministers for EU countries expressed support over the weekend for renewing efforts to change international rules to better reflect digital profits rules via the Organization for Economic Cooperation and Development, a forum of wealthy countries that includes the EU, U.S. and Japan.

European officials argue that companies are taking advantage of outdated tax rules that were designed on the basis of physical assets and where the companies operate, rather than virtual businesses like online advertising and data mining.

"It's a question of fairness: Digital companies use European networks and infrastructure, and often their content and data are created by Europeans. Like all taxpayers, they must pay their fair share of tax," said EU finance chief Pierre Moscovici, adding that the current system allows for "a big loss in tax revenues for the budgets of EU member states."

Failing any progress at the OECD level, the commission said its preferred route would be to amend previously proposed rules to reform the corporate tax base in Europe. The initiative--known as the common consolidated corporate-tax base--is designed to create a common set of rules spelling out how profits should be taxed across the bloc. But any changes could further delay the legislative process as that proposal has already been held up in negotiations with member states who differ over how to proceed.

The other options that the European Commission floated Thursday as short-term and supplementary measures include an "equalization tax" on digital revenue--as opposed to profit--that has been promoted by France and garnered the support from at least 10 EU nations last weekend. It would impose a new tax on companies that have very high digital revenue but pay little in corporate income tax, according to officials in the French finance ministry.

The commission also mentioned a potential withholding tax on digital transactions that would be levied on online providers of goods and services that aren't resident in the EU, and a levy on digital services that would hit transactions made between in-country customers of a nonresident company--such as if a company sold online ads to people in France without a taxable presence there.

The commission acknowledged in its paper Thursday that these taxes have "pros and cons" including potential conflicts with tax treaties aimed at avoiding double taxation, as well as with state aid rules and free-trade agreements. Any tax legislation would also require debate that could stretch for months, and would typically under current rules require unanimous approval by EU member states.

"Yet something has to be done," the commission added.

Write to Sam Schechner at sam.schechner@wsj.com and Natalia Drozdiak at natalia.drozdiak@wsj.com

(END) Dow Jones Newswires

September 21, 2017 06:23 ET (10:23 GMT)