Maltese parliament signals opposition to Brussels’ Facebook tax proposal

Malta’s parliament has closed ranks with a reasoned opinion to the European Commission opposing a common tax system for digital activities inside the EU.

In a reasoned opinion penned by Speaker Anglu Farrugia, the House registered its objection to the proposal for a tax on profits generated by digital services outside the country where a digital company could be physically located, saying the Commission’s proposal does not satisfy the subsidiarity principle.

The Commission’s proposal lays down rules for establishing a taxable base for digital businesses which operated across borders, and for an indicator that estimates how profits would be taxable across borders.

Today member states tax businesses on the basis of physical presence that must be significant enough to amount to a “permanent establishment”. But the proposal would extend this test to include a “significant digital presence” and set a tax rate of 3% on revenue that will hit large companies with global turnover of at least €750 million and €50 million alone inside the EU.

That means that tech giants based outside the EU, like Google and Facebook, will be affected, namely companies which – although not resident in a member state – provide digital services through an interface for users located in another member state.

But Malta’s House of Representatives is one of the few parliaments which has sent a reasoned opinion to the EC opposing the proposal, which could affect Malta’s own revenues from non-resident companies that benefit from 85% rebates on taxes charged to profits booked in Malta.

In it, Speaker Anglu Farrugia says the Commission is impinging upon member states’ tax competence and this infringes the principle of subsidiarity.

“It disregards any consideration on the consequential impacts that the extended permanent establishment would have on other distributive rules, typically found within member states’ double taxation treaties. The approach… does not take cognisance of the needs of smaller markets.”

Even the Danish, Irish, and Dutch parliaments have sent reasoned opinions saying that the proposal is not compatible with the subsidiarity principle.

Farrugia writes that the House of Representatives “recognises [the] common interest in maintain a coherent yet relevant set of international tax rules in view of the digitalisation of the economy”. However, he said the House would only support international solutions that are globally applicable.

“It must be stressed that unilateral EU measures may damage EU companies, thus it must be kept in mind that a risk of damaging competitiveness of EU companies may also be present.”

The larger European countries – Germany, Spain, France, Italy and the United Kingdom – have welcomed the proposal in the absence of a global consensus under the OECD framework. But there are significant differences in opinion on the tax’s application.

The Tax Justice Network (TJN) welcomed the proposal, seeing the tax as an effective way to end the abuses of large digital services companies. Oxfam has said the new tax targeted only a limited number of large companies, and would not prevent businesses from systematically avoiding paying of billions of euros in tax liabilities.

But the OECD says the tax can cause economic distortion and raise business costs.

Digital taxes

France

In 2016, a flat-rate 2% tax on the distribution of audio-visual content was extended to include online video on-demand services that are provided for free but monetised through advertisements shown to viewers. If the services contain pornography or incitement to violence, the tax rises to 10%.

Italy

In January 2019, a 3% levy will be introduced on taxable transactions for suppliers of over 3,000 transactions annually. It is estimated that the levy will raise approximately €190 million a year.

Hungary

The country levies a 5.3% tax on website advertising for entities exceeding HUF100 million in revenue: the nexus is established when the advertisement is shown in the Hungarian language, irrespective of the location of the publisher and of the advertiser. Tax authorities reported a low level of compliance by non-resident companies.

Australia

The southern continent is moving towards taxing digital companies with a levy of 3% on advertising revenue from ‘globally significant enterprises’ with annual turnovers of more than AUD1 billion.