It’s been in the news that the European Union is pushing for a Digital Services Tax which is targeted to mainly hit American tech companies like Google, Facebook, Amazon, Uber, and AirBnB, potentially taxing them close to €5 billion Euro. This tax is a terrible idea for both the EU and US. It is an ungainly protective measure at a time of already increasing transatlantic tensions and will have negative effects on both sides of the Ocean.
This new tax could start a trade war with the United States which could easily backfire. The DST would erect a new tax regime, being levied by the countries where the digital users are located, not based on where the companies are physically present, contrary to longstanding international precedent. This would threaten to undermine healthy tax competition both within the EU and outside of it. Under the current model being promoted, companies with annual worldwide revenues above 750 million Euro ($924 million) or yearly “taxable” revenues above 50 million Euro in the EU could face a 3 % tax on their turnover—in most cases the gross revenue.
The economic effects of those numbers will be very harmful on both sides of the Atlantic, but no matter how a European digital services tax may look like at the end of the legislative process, it would most certainly hurt the European sharing economy.
Digitalization enables people from all over the world to share resources efficiently. Today, unlike ten years ago, people don’t need to own a private car, vacation home, or movie and music collection. Everything can be accessed through the sharing economy with customers only paying for what they really need and use. A recent study from PwC shows that already over 40 percent of Germans, for example, are using shared digital and non-digital services, and the number is increasing every year. This tax would have a tremendous effect on small and medium-sized enterprises, the backbone of European economies, as they are already heavily relying on shared services to increase efficiency and reduce cost.
Unfortunately, the countries that are profiting the most from the new sharing economy are also the ones that are actively calling for a digital services tax. Without Airbnb as a significant player in Spain and Italy’s giant tourism markets, growth couldn’t be achieved nearly as quickly. Prices for customers would shoot up due to a lack of competition. Spain has 12 million annual tourists visiting the country, and 5 million already use AirBnB, generating over 4.1 billion Euro in revenue. Italy has roughly 1 million hotel rooms and already over 190.000 AirBnB apartments.
You can find similar numbers across other parts of the sharing economy: Despite the forceful resistance and opposition of the taxi unions in France (as elsewhere), Uber has over 5 million riders annually with a revenue of over 650 million Euro. A digital services tax would also affect Germany’s important auto industry, investing over 18 billion Euro until 2020 in all digital aspects of modern day driving. Throughout the new economy, thiis tax would lead to less competition, less innovation in Europe, and higher prices for consumers as they are the ones ultimately paying for it. So what it the argument of those pushing forth he digital services tax?
The European Union and some of the member states pushing for a digital services tax are trying to make their case on the assumption (and misconception) that foreign digital companies are not ‘paying their fair share‘, taking advantage of European infrastructure and markets without providing ‘desperately needed‘ funding for overly generous welfare states.
But those who are pushing this tax on a very narrow group of mainly American corporations haven’t backed up their argument as to how this would advance the principle of ‘fairer’ taxation. They’re basing their claims on the EU commission’s vague estimates for effective corporate tax rates (ECTRs), which do not reflect the already high effective corporate tax rates for most companies operating inside and outside the EU. This of course includes digital companies targeted by the digital services tax.
Furthermore, the singular focus of the European Commission on digital companies that are valuable in stock markets falsely confuses market capitalization with corporate revenue. The world’s top 100 companies by market capitalization and the world’s top 5 digital companies can’t be considered representative, as profits in the digital economy vary so greatly. Data shows that the average corporate tax rates of many digital companies actually exceed the European Commission’s estimates by about 20 to 50 percent.
A digital services tax would also be counterproductive and in direct opposition to essential policy goals of the European Union and their member states, promoting digitalization, tax efficiency and neutrality, and a more integrated European market.
In short, the deal that is now cooking up on the proposed digital services tax will do severe damage to European economies, transatlantic relations and could backfire as other countries outside the EU like Malaysia and Peru get inspired to pick up this new form of taxation.
Not only American digital companies need to be looking at the digital services tax for the fundamental threat it poses to the international territorial-based taxation model.