Senate Finance Committee: EU Digital Services Tax Discriminates Against U.S. Companies

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Posted by Andreas Hellmann on Tuesday, October 30th, 2018, 7:30 PM PERMALINK

Senate Finance Committee chairman Orrin. G. Hatch (R-Utah) and ranking member Ron Wyden (D-Ore.) are opposing the European Union’s plan for a Digital Services Tax on major – mostly American – tech companies like Google, Amazon, Facebook and many others as it “violates the long-held principle that taxes on multinationals should be profit-based, not revenue-based.”

In an October 18 letter, addressed to European Council President Donald Tusk and European Commission President Jean-Claude Juncker, Senators Hatch and Wyden write: 

The EU DST proposal has been designed to discriminate against U.S. companies and undermine the international tax treaty system, creating a significant new transatlantic trade barrier that runs counter to the newly launched US and EU dialogue to reduce such barriers. Therefore, we urge the EU to abandon this proposal, urge the member states to delay unilateral action.

As ATR has noted before, the European Union’s proposal for a Digital Services Tax affects tech companies even if they are not physically present in the EU, potentially taxing them close to €5 billion Euro.  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 plan 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.

The letter points out that the European Union and their member states already have a revenue tax based on the location of the customer with their Value-added tax (VAT): Consequently, the DST will undoubtedly lead to double taxation of multinational companies.

Though the EU is claiming that the Digital Services Tax “responds to calls from several Member States for an interim tax which covers the main digital activities that currently escape tax altogether in the EU,” and would, therefore, be temporary, Senators Hatch and Wyden are concerned it could “conceivably last indefinitely.” Their concern is not surprising as the interim Digital Services Tax would only be ditched after the EU’s long-term proposal would be successful:

The first initiative aims to reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels. This forms the Commission's preferred long-term solution. 

This letter comes as the Trump administration is beginning official trade talks with the European Union this week and Trump's threat to impose a tariff of up to 25 percent on imports of cars and parts into the U.S. aimed mostly at Germany, the EU's largest economy, is still on the table. President Trump has agreed not to go ahead with the new auto import taxes as long as negotiations are underway, and it is noteworthy that Austria, France, and Spain are at the same time desperately trying to convince all 28 EU member states to agree on an EU wide proposal in order to stop local efforts by member states to impose their own Digital Services Taxes. Spain and Italy have already legislation similar to the EU original proposal in place that will start taxing companies in 2019.

Therefore, France has recently signed a communique with Spain to call on Austria to join them in their efforts. 

The measure needs unanimous approval by all member states. Many EU member states led by Ireland, the Nordic countries and Malta have been the most outspoken opponents. Germany worries that increasing the tensions on trade with the United States by launching a direct attack on Silicon Valley may threaten German auto exports and is therefore not supporting the EU plans, but pushes for a global solution: We need a minimum tax rate valid globally which no state can get out of,  said German finance minister Olaf Scholz.

Photo Credit: Kevin White

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