The European Union will take measures to tax US tech giants if the international community doesn’t agree to a new system early next year, Competition Commissioner Margrethe Vestager said on Tuesday (21 November).

“Last month, the Commission launched a public consultation on how to tax the digital economy,” the Danish Commissioner told a conference organised by the French economy ministry in Paris.

She said the EU would use the results of the consultation in negotiations being held under the auspices of the Organisation for Economic Cooperation and Development (OECD), the 35-nation club of industrialised nations.

But Vestager warned that “if there’s no international answer to this issue by spring next year, we’ll produce our own proposal for new EU rules to make sure digital companies are taxed fairly.”

Spurred on by French President Emmanuel Macron, who has slammed the likes of Google, Facebook and Apple as the “freeloaders of the modern world”, EU leaders have agreed to tackle the question.

The Commission opened an in-depth investigation on 26 October into the UK exemptions granted to multinationals to protect them from tax avoidance rules, as part of Vestager’s efforts to curb tax avoidance practices, one of the Commission’s top priorities since 2014.

Commission launches probe into UK tax exemption for multinationals The European Commission decided on Thursday (26 October) to open an in-depth investigation into the UK exemptions granted to multinationals to protect them from tax avoidance rules.

A few weeks earlier, it ordered online sales giant Amazon to pay back taxes worth around €250m to Luxembourg, where it had enjoyed “illegal tax benefits”.

Commission orders Amazon to pay €250 million in back taxes The European Commission ordered Luxembourg on Wednesday (4 October) to recover unpaid taxes worth around €250 million from the online sales giant Amazon, saying the country had granted Amazon’s European arm “undue tax benefit” by allowing it to shift profits to a tax-exempt shell company.

Vestager said on Tuesday the decisions on special tax treatment Apple got from Ireland and Amazon from Luxembourg “are only a part of a much bigger investigation that goes well beyond technology.”

“We’ve looked at more than 1,000 tax rulings as part of that work. We’ve found that Fiat, Starbucks and a whole series of multinationals got illegal state aid from Luxembourg, the Netherlands and Belgium.”

She said the investigation had shown that “our tax systems aren’t well designed for modern ways of doing business. Tax systems that are based on a company’s physical assets can’t easily deal with digital companies. And in fact, domestic digital businesses pay less than half the effective tax rate of their offline equivalents.”

Today’s tax rules were designed for when multinationals developed real assets and operations in different nations, making it relatively clear where taxes were paid.

But the US tech titans exist almost exclusively in the virtual world, their services piped through apps to smartphones and tablets from designers and data servers oceans away.

In accordance with EU tax rules, they choose to report income in an EU nation with low tax rates, depriving the others of millions if not hundreds of millions in tax revenue.

The OECD believes that such tax schemes cost governments around the world as much as $240bn a year in lost revenue, according to a 2015 estimate.

The Commissioner said it would take “more than competition rules to fix that issue. It will take a reform of our tax systems, not just nationally, but internationally. We all know how much France has done, to put this question at the top of the agenda. And we have a responsibility to work together to find the right answer”.

France has proposed taxing the US tech giants on sales generated in each European country, rather than on the profits that are cycled through low-tax countries.

The EU could also tackle the problem via the harmonisation of rules on calculating the tax base of firms, which is currently under consideration.

Vestager said the EU should not stand in the way of progress and innovation, particularly in digital economy, but it should make sure that digital “companies use our data responsibly…and respect our basic rights to privacy”.

“Right now, less than a quarter of Europeans trust online businesses to protect their personal information. That’s why we have new rules on data protection, which apply from next May. And competition enforcement can make a difference too. It can help to make sure we have diverse online markets, where companies compete not just to cut prices, but to protect our privacy better.”