Online giants are facing increasing pressure in Europe over the low tax they pay, but states have often found it difficult to raise the bill because existing rules limit the taxation rights to the countries where companies are physically present.
The current legal framework favors digital companies over their physical counterparts and deprives states of valuable tax revenues, the Estonian presidency of the EU said in a document prepared for an informal meeting of finance ministers in Tallinn on Sept 15-16.
The document proposes a reform of international tax rules to change the concept of “permanent establishment” so that digital multinationals could be taxed where they create value, and not only in countries where they have established their tax residence.
The proposal comes as several EU countries are negotiating with large digital companies the payment of back taxes, but face legal hurdles to obtain payments.
In July a French court ruled that Google, now part of Alphabet Inc, was not liable to pay 1.1 billion euros ($1.3 billion) in back taxes demanded by French authorities because it had no “permanent establishment” in France and ran its operations there from Ireland.
Under the Estonian proposal, even without physical presence, large digital businesses would be liable to the corporate tax of the countries where they make profits. A “virtual” permanent establishment would be enough to justify taxation.
The proposal goes beyond existing tax principles agreed at international level by members of the Organisation for Economic Cooperation and Development (OECD), which includes EU states, the United States, Japan and other rich countries.
It is also more ambitious than proposals currently discussed at EU level to tackle multinationals’ low tax bills, such as a common corporate tax base.
The 28 EU states have a veto power on tax issues and some of them have blocked reforms in the past.
To avoid a quick backlash, the Estonian presidency is proposing to discuss the issue in the coming months to reach a common position in December.
This common stance at EU level should then be used to push changes at global level, the Estonian paper said.
No changes at EU level are foreseen unless rules are amended globally. This is aimed at avoiding a loss of competitiveness of the EU economy.