December 27, 2018

France and Germany’s compromise over the EU Digital Tax

It is slimmed down with a new name and few safeguard clauses, but will it be any more attractive to its opponents than its predecessor, known as the European Union Digital Service Tax?

If first reactions to the Digital Advertising Tax – the new name EU presidency holder Austria gave it only days after the DST was about to hit a wall in the Council of Economic and Financial Affairs – the prospects are not good. After the Austrians quickly redrafted the tax scheme aimed at large internet companies, such as Google and Facebook and gave it a first test drive, hardline opponents did not budge.

Despite a significantly reduced scope that would include only the targeted online advertising revenue earned by search engines and social media companies with an annual turnover of 750 million euros, the message from Nordic nations Denmark, Sweden and Finland as well as Ireland was the same: EU taxation on revenues instead of profits is unacceptable and no decisions should be taken until there is an OECD agreement on digital taxation.

Finnish officials went even further by making it clear they oppose the concept of taxing user value creation, which is the legal underpinning of the temporary EU Digital Service Tax proposed in March by the European Commission.

We do not believe that user value creation should betaxed” Finnish tax experts insist. “It is the brains behind the user value creation and their profits that should be taxed”.

BusinessEurope, which represents more than 10,000 of the largest companies in the EU, added its powerful voice to the DST-DAT sceptic camp. It called for new economic analysis to justify the need for a temporary digital tax – no matter the name or its targets. The lobby group insists the European Commission’s claim that digital companies only pay on average 9 percent in corporate tax compared to 21 percent by traditional brick-and-mortar companies has been thoroughly debunked. In a letter to the Austrian presidency, BusinessEurope cited not only the rejection of the Commission conclusions by the German economist whose research the EU executive body based its conclusions but also other recent analysis including studied by the well-respected Copenhagen Economics consultancy.

The new Digital Advertising Tax is based on the Franco-German compromise plan introduced on the eve of the Dec. 4 meeting of EU finance ministers. In order to convince Germany to back the digital tax, French Finance Minister Bruno Le Maire a greed not only to reduce the scope by dropping online intermediate platforms such as UberAirbnb and Ebay, but also by eliminating the sale of online user ID info.

German support for the plan was also conditioned on a commitment to push for an OECD and EU agreement on a minimum corporate tax rate similar to what is in the U.S. Corporate tax provision known as the Global Intangible Low-Taxed Income(GILTI), approved at the end of 2017.

Wary that the DST might lead to other countries, in particular China and India, to tax German exports, especially automobiles, Germany reluctantly agreed to the compromise after six months of relentless lobbying by Le Maire. But is German Finance Minister Olof Schulz now an active convert or passive supporter? That could make the difference in the next three months, when new EU presidency holder Romania pursues a DAT agreement in the Council of Ministers.

And despite continued Nordic opposition, the groundswell for an EU digital tax on the revenues of at least Googleand Facebookcontinues to grow. After its failure to achieve a victory on the EU level in December, Le Maire announced on Dec. 17 the intention to impose a digital tax in France. It is not clear whether it will be classified as a tax on profits or as a value added tax.

The French plan follows on from the digital tax announced by U.K. Chancellor of the Exchequer Philip Hammond. That scheme is also targeted only at digital advertising revenues earned by large search engines and social media giants. Spain will also implement its own digital tax in 2019. Overall there are now more than 12 EU countries adopting their own national digital tax plans.

 The support for a digital tax on large internet companies was also evident on Dec. 13, when the European Parliament voted by a significant majority in favor of its version of the DST. Although the European Parliament only has consultation rights when it comes to EU tax legislation – instead of co-decision powers that it has on single market and judicial affairs proposals – its vote does send an important political signal. By a vote of 451 in favor with 69 against and 64 abstentions, the European Parliament not only backed the old DST but its version of the law calls for an expanded scope to include online streaming companies such as Netflix and Spotify.

Regardless of whether there is an EU DAT agreement, or if there is a mishmash of different individual EU member state taxes imposed on large individual internet companies, most tax experts agree that inevitably the European Court of Justice will have to decide if a levy on revenues instead of profits – other the EU Value Added Tax – complies with EU law.