* EU Commission says solution needed to address distortions
* Online firms pay much less tax than traditional rivals
* France-backed turnover tax seen as short-term solution (adds details from draft report))
By Francesco Guarascio
BRUSSELS, Sept 20 (Reuters) - The European Commission said the EU should proceed with an overhaul of taxes on digital firms even if the rest of the rich world did not follow suit, a draft report said.
The document is part of an EU push to tap more revenues from online multinationals such as Amazon and Facebook , who are accused of paying too little tax in Europe by routing most of their profits to low-rate countries such as Ireland or Luxembourg.
The draft report, to be adopted on Thursday, said that on average brick-and-mortar multinationals pay in taxes in the EU more than twice what their digital competitors do.
Traditional large firms face a median 23.2 percent tax rate, while digital giants do not pay more than 10.1 percent - and when they sell directly to customers, rather than to firms, their effective rate goes down to 8.9 percent, data cited by the Commission showed.
An earlier report by a European lawmaker said EU states may have lost in tax revenues up to 5.4 billion euros ($6.5 billion) just from Facebook and Google, now part of Alphabet, between 2013 and 2015.
“A level playing field is a pre-condition for all businesses to be able to innovate, develop and grow,” the Commission said, adding that fairer taxation of the digital economy was urgently needed.
Partly because of the uneven taxation, revenues in the EU retail sector grew on average by only 1 percent a year between 2008 and 2016, while in the same period revenues of the top-five online retailers, such as Amazon, grew on average by 32 percent per year, the Commission’s report says.
The document, seen by Reuters, will be presented at a summit of EU leaders on September 29 dedicated to digital issues. Despite divergences and scepticism among some smaller states, the 28 EU countries are expected to find common ground on digital taxation by December.
The Commission is seeking a compromise among rich countries worldwide in a bid to reduce opposition from EU states that fear losing competitiveness if the EU moves ahead on its own in this field.
But “in the absence of adequate global progress, EU solutions should be advanced within the single market”, the document said, adding that a legislative proposal may be presented in the spring regardless of global developments.
The best way to tackle distortions would be to review the notion of “permanent establishment” so that firms could be taxed also in countries where they do not have a physical presence, the Commission said.
At the moment online companies can often avoid paying taxes in countries where they generate large revenues because they do not have a physical presence there.
A proposal to change the corporate tax base is already under discussion in the EU. The Commission believes it represents “a basis to address these key challenges”, but needs the unanimous support of EU states to turn the plan into law.
To move ahead more quickly, the Commission said short-term solutions could be considered. They include an “equalisation” tax on turnover, as proposed by France and backed by 10 EU countries, the report said.
Alternative short-term options would be a withholding tax on payments to digital businesses and a levy on revenues from advertisements or other services provided by digital firms.
But short-term options “have pros and cons, and further work is needed”, the Commission said, warning that they may go against double-taxation treaties, state aid rules, fundamental freedoms and EU international commitments under free trade agreements and the World Trade Organisation (WTO). ($1 = 0.8338 euros) (Reporting by Francesco Guarascio @fraguarascio; Editing by Philip Blenkinsop and Gareth Jones)