December 6, 2018

EU Digital Tax: Ball Over to Romania

Faced with a two-front fiasco, French Finance minister Bruno Le Maire realized it was time to cut a deal. And, certainly, compromising with Germany and other EU member states was an easier option than dealing with the violent gilets jaune protests triggered by increased fuel taxes.

As a result, European Union nations will make a renewed effort in 2019 to find agreement on an EU Digital Service Tax despite a tepid and sometimes outright rejection of a last- minute Franco-German compromise proposal to narrow the scope of the 3 percent levy.

Romania, which will take over the rotating EU presidency on Jan. 1, agreed it will make the resized DST as a priority with the intention to reach an agreement by March. The new plan would target only large Internet companies that sell online advertising including Google Inc. and Facebook Inc.

We recognize the need to try and find a fair and coherent solution to this issue as the EU level”, said Romanian Finance Minister Eugen Orlando Teodorovici during a Council of Economic and Finance Minister debate on the DST proposal.

The deal Le Maire cut with Germany to get its elusive DST support involves a two-pronged compromise. The first part calls for a 3 percent DST with a “tax base referring to advertisement on the basis of a 3 percent tax on turnover”. As a result, intermediate online platformsused to buy and sellgoods and services as well as the sale of user ID info would be dropped.

One caveat here: the new plan “would not prevent member states from introducing in their domestic legislation a digital tax on a broader base”. That allowance would certainly undermine European Commission arguments that a DST is necessary in order to keep harmony in the EU single market.

The second part of the Franco-German compromise calls for an OECD-EU agreement for establishing a minimum corporate tax rate.

The reaction from countries led by Finland, Denmark and Sweden as well as Ireland was similar to their objections to the original DST proposal put forward by the European Commission in March.

The German-France proposal will not take away our concerns about taxing user value creation”, said Finnish Finance Minister Petteri Orpo stated at the Dec. 4 meeting. “This is a fundamental issue for us”.

Irish Finance Minister Paschal Donohoe, another stalwart opponent of the DSTand whose country hosts the European headquarters of Google and Facebook, stated “we have strong principled concerns about this policy. We continue to believe a global solution at the OECDis preferable”.

Despite the continued objections by the Nordic nations and Ireland, the new political calculus they face in 2019 is support from Germany– the largest EU member state– for the revised DST scope. 

If Germany throws its weight behind this proposal it will definitely change the dynamics”, European Commission officials said after the EU finance meeting. “But this will all become much clearer in January and February when the technical discussions on the proposal take place”.

Le Maire, who has been the most outspoken DST support, gave a passionate speech Dec. 4 to his fellow finance ministers insisting there is more at stake than taxation of the “internet giants”, as he refers to companies such as Google, Facebook, Apple, Amazon and others.

This is about the future of the digital economy in Europe” said LeMaire.The internet giantshave so much cash they can and do buy up any new start up. This capitalistic concentration is a major problem”.

The plan put forward by Franceand Germany also calls for the European Commission to draw up a new DST proposaland present it in March. However European Taxation Commission Pierre Moscovici rejected that idea during the Dec. 4 debate.  “We believe the compromise proposed by Germany and France can be adapted as a compromise text based on the current proposal” Moscovici said.

The new DST plan for 2019 comes as concerns continue about the precedent set by a tax on revenue instead of profits, especially for exporting EU companies doing business in Asia or the United States. According to a Dec. 3 report released by the European Centre for Political Economy, the EU would end up net loser if there was a retaliation because it is the world’s largest exporter of services.

The EU is the world’s largest exporter of services” the report said. “Given the surplus the EU will always be in a position where it has more to lose from a tit-for-tat cycle of retaliation” the report stated.