A Tech Revenue Tax for Europe?

Posted on 23rd March 2018

On 21 March 2018 the European Commission unveiled legislative measures designed to ensure digital businesses pay their “fair share” of tax in EU member states. The measures are billed by the Commission as “fair and growth-friendly” – but criticism is already mounting that the plans are discriminatory and could harm the EU’s digital economy. As the US and business groups weigh in, and with the international OECD Base Erosion and Profit Shifting (BEPS) project still ongoing, are the EU jumping the gun?

The Commission proposal has two main strands:

One: a Directive laying down rules relating to the corporate taxation of a significant digital presence

Two: a Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services

Commentary and reaction

The Commission had been confident of broad support in Council for these plans, driven by Franco-German cooperation. However, as reported in Politico, German government officials are apparently wavering, worried that new tax measures could spark retaliatory action from the US in the form of import tariffs on Germany’s auto manufacturers.

United States

Silicon Valley has already come out swinging, enlisting its various lobbying arms to oppose the new tax and using US Treasury Secretary Steven Mnuchin as a mouthpiece to speak out against the tax. Mnuchin said that “the US firmly opposes proposals by any country to single out digital companies” and, as the FT points out, “one diversionary tactic is to entangle the tax with other transatlantic disputes, including that over US steel and aluminium tariffs.” House Ways and Means Chairman, Kevin Brady, an influential lawmaker on tax, has followed Steven Mnuchin’s assertive stance, saying that the EU’s effort to tax tech companies is just another example of the EU going after US companies.

OECD

Reacting to the DST proposals, Business at the OECD (BIAC) called for a general agreement on a consistent tax framework for all companies, while warning EU policy-makers that international taxation is at risk of fragmentation, which could reduce economic growth and job creation. Will Morris, Chair of the BIAC Committee on Taxation and Fiscal Affairs, stated that “we strongly encourage the European Commission to work with the OECD/G20 Inclusive Framework to help develop a global consensus through a broad multilateral process that includes all stakeholders.”

Short-term gratification or long-term reform?

Proposals of this kind have emerged several times in recent years and failed to come to fruition. This time, though, plans have more momentum. Significantly, while the UK previously vetoed measures to consolidate the tax base across EU countries, the UK is now one of the most active proponents of an interim solution to increase the tax yield from the digital economy.

More problematic is that the original champions of the OECD BEPS project, an enormous multilateral project to combat tax avoidance with over 100 countries involved, no longer seem willing to wait for it to come to fruition, which begs the question of why the international community should engage in lengthy multilateral reform if the EU will go off and do their own thing anyway. In pushing interim solutions, EU countries may find that they sow the seeds of discord which ultimately undermine international efforts to create a new corporate tax framework which properly accounts for value creation in the digital age.

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