EU's Digital Services Tax: A Downward Spiral for Tax Competition

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Posted by Andreas Hellmann on Tuesday, September 4th, 2018, 2:49 PM PERMALINK

The European Union is now cooking up a backroom deal on the proposed digital services tax that has run into some roadblocks out in the open. Finance ministers of the member states will meet this week to discuss various proposals to adopt a tax on companies’ digital turnover by the end of 2018.  This comes amid a backdrop of worrying country-by-country signs.

This tax is a terrible idea as it intentionally targets a specific category of very commonly used services and reflects an outdated industrial policy outlook, which in its core is designed to damage an innovative industry. Coincidentally this industry is almost non-existent in the European Union.

As Americans for Tax Reform has noted, this tax is aimed squarely at American tech companies like Google, Facebook, Amazon, Uber, and AirBnB, even if they are not physically present in the EU, potentially taxing them close to €5 billion. 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 earlier Commission proposal has not received the unanimous support from member states that it would need to become law EU-wide. Countries with lower tax rates such as Luxembourg and Ireland, which host large American multinational companies, vigorously oppose these plans as they diminish tax competition within the Union to their (and taxpayers’) disadvantage.

While the EU is trying to reach an agreement, individual states are free to implement their version of a digital services tax, and they are acting quickly:

Spain's new Prime Minister Pedro Sánchez of the social-democratic (PSOE) government has backed the former government's “2018 Stability Programme and Budgetary Plan” to implement the new tax.  This would put them in line with the now-tabled European Commission’s proposal beginning in 2019, while they continue to push for the EU-wide tax at the same time. The most significant and most drastic difference is that Spain aims for a permanent tax as opposed to the EU's ‘temporary’ plan. Spain's finance minister Cristóbal Montoro said the revenue will be used to fund increased pensions and an expansion of the welfare state.

Meanwhile, France's finance minister Bruno Le Maire met with his Spanish counterpart Nadia Calviño on September 4th, releasing a communique that calls for a European Digital Tax as soon as possible, claiming that both of their countries’ citizens demand ‘fair and equal’ taxation of those - again mainly American -  companies.

Just to the east, the Italian government has introduced a new “Digital Tax” in their 2018 Budget Law, with significant amendments compared to the initial draft, and a new definition of permanent establishment, again partially in line with the EU's proposal, starting from January 1st, 2019. Now a "significant and continuous economic presence in the territory of the state set up in a way that it does not result in a substantial physical presence in the same territory may constitute a permanent establishment." Other factors such as revenues and number of users or customers will be indicators for a significant presence.

The Digital Services Tax is a terrible idea. It is an ungainly protective measure at times of already increasing transatlantic tensions. It could start a trade war with the United States which could easily backfire. The DST would erect a new tax regime, as the tax would be levied by the countries where the digital users are located, not based on where the companies are physically present, which would threaten to undermine healthy tax competition both within the EU and outside of it.  American politicians and companies need to be looking at the DST for the fundamental threat it poses to the international territorial-based taxation model.

Photo Credit: openDemocracy

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