Despite the emergence of new digital activities and the increasing digitalisation of our societies, our tax rules have not changed for nearly a century. They are still based on the principle of a physical presence, whereas the activity of digital companies is inherently intangible. As a result, they are currently barely, if at all, taxed in the European Union. The effective tax rate on the profits of digital companies is on average 9%, compared to more than 20% for traditional companies. This situation is intolerable. It threatens the long-term sustainability of our public finances. It distorts the conditions of competition for companies operating in our single market. Finally, it undermines the most fundamental principles of tax justice, and weakens the ordinary citizens’ acceptance of taxation as the basis of our modern states.
To put an end to this injustice, in March 2018 I presented two proposals to ensure the fair taxation of digital activities. The first one aimed to modernise the rules on corporation tax by introducing the concept of « digital presence » in order to fill the legal gap that prevents EU Member States from taxing digital companies. The second, more targeted proposal aims to introduce a temporary tax on the turnover generated by certain digital activities in the Union in order to fill the growing hole in the coffers of our Member States.
After 13 months of intense negotiations and sometimes heated discussions, the EU’s 28 Finance Ministers unfortunately failed to reach an agreement on these proposals. I obviously regret this, but it came as no surprise. In EU taxation policy, the unanimity rule has often paralysed us. I suspected that a minority of Member States, defending a European taxation framework in which competition is a tool for competitiveness, would block progress. Despite our best efforts and the pressure from public opinion and the European Parliament, this blockage could not be overcome.
However, the complex work that brought us close to a compromise has not been in vain. On the contrary, our initiative has turned taxation of the digital economy into a political priority in the EU and around the world. I believe that this is one of the most significant achievements of my mandate as European Commissioner for Taxation.