Kevin Adams

U.S. Trade Representative Lighthizer Warns France: No Digital Services Tax

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Posted by Kevin Adams on Wednesday, June 19th, 2019, 4:42 PM PERMALINK

Speaking in front of the House Ways and Means Committee on Wednesday, U.S. Trade Representative Robert Lighthizer said he believed the proposed French digital tax is “a tax that’s geared toward hitting American companies disproportionately.” Lighthizer also noted that he believes President Trump “would respond very strongly” should France or the European Union follow through on their proposals for digital services taxes. 

This latest development comes as world leaders prepare to gather in Japan next week for the G20 Summit. The development of a global consensus on the taxation of the digital economy is expected to be a hotly debated issue. Some countries, such as the United Kingdom, have backed off their plans to impose their own digital services tax, opting instead to wait to see what develops at the multinational level. 

The French proposal is a 3% tax on the revenues of companies with more than 750 million Euros in worldwide revenue. This is a short list of only about 30 companies, the vast majority of which are American companies such as Facebook and Google’s parent company Alphabet Inc. 

If enacted, a digital tax from France or the European Union could lead to retaliatory measures form the United States. If determined to be discriminatory, the U.S. could challenge the tax at the World Trade Organization or start issue tariffs under Section 301 of the U.S. Trade Act. A never-used provision of the tax code, Section 891, could even allow the U.S. to increase taxes on U.S. subsidiaries of French companies.

Instead of going alone, France and the EU should wait for talks to play out at the multinational level. The Trump administration has been engaging with the OECD to develop international rules do not unfairly target American companies. Should France choose to move forward, it will only be the beginning of a lengthy fight between two allies. 

Photo Credit: World Bank Photo Collection


EU Misses Mark with Tax Plan

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Posted by Kevin Adams on Thursday, January 18th, 2018, 10:00 AM PERMALINK

According to a study by the U.K. based Tax Justice Network, the implementation of the Common Consolidated Corporate Tax Base (CCCTB) by the European Commission would devastate the tax base of many small EU member states. Countries such as Malta, Slovenia, and Estonia could see their tax base shrink by more than half due to the formulary apportionment in the CCCTB. On the other hand, larger member states such as Germany, Spain, and Italy are expected to benefit greatly from the new proposal.

 

Proponents of the CCCTB argue that it will cut red tape for firms by providing a single EU system for taxes, thus eliminating the need to file corporate tax in each state that business is conducted in. However, the ability to control tax rates is a key part of state sovereignty. Whether low-tax or high-tax, member states should maintain the right to control their tax rates and enforce their tax codes as they see fit, without the interference of the European Commission.

 

Further, EU attempts to harmonize the corporate tax system into a common, cross-union system violates the subsidiarity principle of the EU. Defined in Article 5 of the Treaty on the European Union, subsidiarity aims to ensure that decisions are taken as closely as possible to the citizen. The Union is only justified to take action in matters where the objectives of the action cannot be accomplished by member states. In terms of the CCCTB, the taxation of corporations is best left to each member states to accomplish its tax objectives as it sees fit.

 

As larger member states continue to push the CCCTB, they miss the key issue at hand. Instead of proposing the CCCTB that will harm smaller member states, larger states can reform their own tax systems. The purpose of the CCCTB is to “level the playing field” according to the European Commission. This can be done through states undertaking tax reform that lowers their corporate tax rates, making them more competitive against smaller states such as Malta. The EU should be focused on encouraging its members to undertake pro-growth tax reform, not robbing its members of their sovereignty in order to compensate for high-tax states.

Photo Credit: Pascal Terjan

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EU Takes Aim at Tech Giants with Revamped Digital Tax Proposals

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Posted by Kevin Adams on Tuesday, October 31st, 2017, 1:30 PM PERMALINK

In recent weeks the European Commission has been discussing proposals to raise taxes on digital firms that operate within the European Union. The move is aimed mostly at Google, Apple, Facebook, and Amazon. A number of proposals have been introduced, including revisiting the rules for permanent establishment, tax harmonization to a common corporate tax base, and instituting a turnover tax. Any proposal is likely to receive backlash from low-tax EU member states, eventually leading to procedural hurdles in adopting EU law.

 

Under current rules, corporations must have a physical presence in a country in order to be subject to that country’s taxing authority. This includes a store-front, warehouse, or processing center. Major digital firms are able to locate in one country and sell goods to consumers in other countries remotely, through the internet. These firms will be subject to corporate tax where they are based (often low tax countries) and not subject to corporate tax in foreign countries where consumers are buying their goods. To counter the incentive for corporations to locate in low tax countries, the EU has proposed revisiting the rules on permanent establishment. New rules would likely move away from requiring a physical presence in the country and instead rely on the sale of goods as a basis for companies being subject to taxation, or a “digital” presence.

 

Changing the language to redefine permanent establishment is seen as a long-term solution by the EU. In the meantime, more short-term proposals are aimed to stop-gap the loss of tax revenues faced by many higher tax countries. One such proposal is the establishment of a common corporate tax base across EU member states. This would establish a common set of tax rules across the EU that could address issues of permanent establishment and other factors that influence where countries choose to locate their headquarters. This scheme of tax harmonization could ultimately lead to higher rates for many countries, without the vote of their respective legislatures. This imposition of higher taxes through the supranational European Union violates free market principles, as I’ve discussed here

 

Another EU proposal is an equalization tax, or turnover tax. This would be a tax on all untaxed or insufficiently taxed income generated from the internet-based business activities of a firm. Traditionally, firms are taxed on their profits, which is their revenue minus costs. This turnover tax would abandon this concept of when to apply tax, and have it applied directly on revenues. This puts smaller firms and firms with smaller margins in peril, as taxes irrespective of their profits could ultimately lead to the taxation of loss-making industries. 

 

Any proposal favored by the European Commission is likely to face stringent opposition from some EU member states. Countries such as Ireland, Malta, and Luxembourg have corporate income tax rates well below the EU average, and will oppose any measure that raises their rates or sees their ability to attract corporations decreased. EU tax law changes require the consent of all 28 member states. This unanimity requirement will be a fierce test of the divide between low tax member nations who wish to maintain their autonomy of their tax rates, and high tax member nations who seek to collect more in revenue from digital firms.  

Photo Credit: Stuart Chalmers

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EU Tax Harmonization Will Destroy The Free Market

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Posted by Kevin Adams on Thursday, September 21st, 2017, 3:36 PM PERMALINK

The European Union (EU) has recently revived plans for corporate tax harmonization. Such a plan will establish a uniform corporate tax rate across all its member nations. Currently, EU member nations set their own corporate tax rates, resulting in rates ranging from 10% in Bulgaria to as high as 35% in Malta. The ability for a nation to control their corporate tax rate allows for tax competition between nations. In today’s economy, capital is highly mobile. Multinational corporations can move their headquarters to low-tax jurisdictions from high-tax ones. Countries with low tax rates compared to their neighbors are at a comparative advantage in their ability to attract investment and jobs. 

By harmonizing corporate tax rates across the EU, this competition, a pillar upon which the free market is built, is destroyed. Any sort of tax harmonization enacted will be toward the higher end of the tax spectrum. This will allow high-tax nations such as France to no longer lose companies and investment to lower taxed nations such as Ireland. Tax harmonization will limit the ability of people and corporations to move at will, as it reduces economic incentives through a supranational approach.

The push for higher corporate taxation in the EU comes at a time when the United States is headed in the opposite direction. President Trump has proposed slashing the United States’ 35% corporate tax rate (the highest in the developed world) to 15%. This aims to attract more investment to the U.S., as well as stop the flow of companies relocating their headquarters abroad in order to pay lower rates. The trend in recent decades has been for developed nations to cut their corporate rates in favor of lower, more pro-growth rates; a sign that tax competition works in promoting nations to lower corporate taxes in order to attract more business.

Taxes are the price a company pays for doing business. Just as two restaurants may compete over who can offer the better deal, so too should countries be able to compete using their tax codes. As Contribuables founder Alain Dumait said: “the very freedom of individuals depends on competition. Including in the tax sector.”

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