26 November 2018
The digital services tax: Now or never?
The December meeting of EU finance ministers will be interesting. There are countries that staunchly support the proposed digital services tax on a European level, while others reject it. In addition, some countries, such as the United Kingdom and Spain, have revealed national plans to implement a similar digital tax. There are concerns that the United States might retaliate.
On 4 December, EU finance ministers could decide whether to introduce an EU-wide digital services tax (DST). Strongly supported by some member states, in particular France, while opposed by others, including Ireland and Sweden, the taxation of technology giants has become a major discussion topic.
The central issue concerns large US-headquartered digital companies, who pay marginal tax rates on their profits generated outside the US. The current international tax framework under the OECD only regards the permanent establishment of a company as giving grounds for taxation – an element that digital companies have circumvented with their business model.
What are the positions?
The discussions are sensitive due to the various interest groups affected. There are the European Commission and certain EU member states who believe that new-age companies that operate online are not paying their fair share of taxes. On the other hand, tech companies and various interest groups across Europe see the proposed DST as discriminatory, as it focuses only on a specific industry.
There are also the EU member states who have used low corporate tax rates as an enticing selling point, leading to the creation of jobs and stimulating their economies. Moreover, the proposed tax could lead to a transatlantic dispute, as the United States sees it as singling out American firms. Finally, there is the public who over the past years have regularly heard how corporations are devising global schemes to benefit from low tax rates.
The Commission has called for a 3 percent tax rate on the digital revenues of companies. However, a threshold would apply – companies that have total global revenues of at least €750 million and European revenues of €50 million would fall under the scope of the tax. It is estimated that around a hundred companies would be affected, of which half have their headquarters in the US.
The largest difference from the current tax schemes would be the taxation of the gross revenue of a business. This is done so that the tax would cover companies that are high profile, but either have very low profit margins or are reporting losses.
Supporters and opponents
The strongest voice supporting the DST has been France, where it has become a central issue for the government. French President Emmanuel Macron has staked considerable political capital on the adoption of a digital tax. The French see a consensus on the tax to showcase successful European cooperation and potentially deal a blow to the populist movements in the European Parliament elections next May.
Some Members of the European Parliament have also supported the proposal, even suggesting that the 3% rate be increased. Germany has voiced a willingness to reach agreement before the end of 2018. Berlin’s main concern has been its car industry, which could either be exposed to retaliatory measures from international partners or even fall within the scope of the proposed taxation scheme. As of the end of November, after being reassured that the auto industry will not be affected, Germany has warmed up to the French model.
Opposition to the digital services tax is diverse. The Nordic countries fear that the tax could stifle innovation and sour relations with the United States, leading to retaliatory measures. Ireland opposes the tax on the grounds that the DST would breach international treaty obligations. Ireland has also enjoyed considerable investments that businesses have made due to its low corporate tax rate. Supporting the digital services tax in the present form would certainly oppose their own national interests.
There is strong opposition from across the Atlantic as well. In October, the US Senate’s Committee on Finance sent a letter to both the European Council and the European Commission, urging them to abandon the DST proposal. Senators view the tax as discriminating against US companies, undermining the international tax treaty system, and leading to double taxation. Instead, they favour reaching a resolution under the auspices of the OECD.
There are also other opponents to the tax. The Federation of German Industries has voiced strong concerns about the proposal, as it would have negative effects on the German industry and could hinder any future national efforts to adopt digital business models.
Furthermore, European companies such as Spotify and Booking.com sent a letter in October to European finance ministers, arguing that the tax could disproportionately affect companies who generate their revenues primarily in Europe. This in turn could hamper the competitiveness of European companies on an international level.
If an agreement is not reached during the December 4 meeting, it may well be postponed until further notice. As Commissioner Pierre Moscovici put it, the year 2019 will be dominated by Brexit, the European Parliament elections and the appointment of the new Commissioners thereof. That could very well delay the issue to 2020.
Member states taking their own initiative
Nevertheless, there seems to be consensus that the current taxation system is not well-equipped to cope with the digital world. Many EU member states are having discussions about implementing their own national regimes. Philip Hammond, chancellor of the Exchequer of the United Kingdom, announced a special tax in October on online firms that would generate at least £500 million a year in global revenue.
The tax would target revenue from social media platforms, search engines and online marketplaces at a rate of 2 percent. The British government expects the tax, which would come to force in April 2020, to raise £400 million annually.
An analysis by the UK’s Office for Budget Responsibility, however, sees that target attainable from 2023 onwards, while in the first year the tax would generate £275 million.
Spain is also planning on introducing a special levy for online companies. It will target sectors such as online retail sales and online food companies, but also collaborative economy businesses, such as Airbnb and Uber. The tax would target companies with a revenue exceeding €3 million in Spain and €750 million internationally.
Alternatives to the DST
Opponents to the DST have pointed to the OECD as the appropriate forum to establish a new global tax regime. But talks at the OECD level have been slow, given the complexity and diversity of interests of the discussions.
This has led both member states and Brussels to take the initiative, with the EU hoping to reach a consensus on a European level in order to have a harmonised approach to the issue.
Sunset clause as compromise?
A sunset clause has also been suggested for the DST. This entails that the tax would end once a deal is reached at the OECD level. It ensures that the issue would be dealt with immediately, while the discussions for a global solution, which can take years, are being held. The sunset clause would also appease Member States opposing the DST.
Nevertheless, given the likelihood that the United States will oppose any agreements that penalise their companies and interests, it is unlikely that a deal at the OECD level will be reached in the near future.