Novembre 13, 2018

The Bumpy Journey of the Digital Service Tax

Danish Finance Minister Kristian Jensen made sure he was the first to arrive at the Nov. 6 EU finance minister meeting. He was on a mission. For months his patience, as well as that of a few other countries opposed to the pending EU Digital Service Tax, had worn thin with the EU presidency holder Austria as it pushed aside their objections to the pending Digital Service Tax.

Besides his frustration with continued claims by Austria that all DST technical issues have been resolved and all countries are on board for a DST agreement in December, there was alarm at the EU-wide barnstorming pressure imposed by French Finance Minister Bruno Le Maire. He was pushing all the populist buttons. No less than the fate of the EU itself was on the line with the DST, according to Le Maire and French President Emmanuel Macron.

So, when Jensen‘s chauffeured car pulled in through the gate at the ministerial arrival door of the EU Council of Ministers, the Dane made a bee-line for the scrum of “door-stepping”journalists. In an unequivocal message Jensen made it clear that the chances of all EU finance ministers backing the DST on this day or any time in the future was non-existent.

In our view it is important we follow the road of an OECD solution,” Jensen said. “Considering how much our European companies export it is not a good idea to put a tax where consumption is instead of where profits are earned.

He continued by insisting: “there are many technical issues unresolved. We have important questions about issues concerning double taxation and international treaties. We have still have received no answers about these”.

An hour or so later in it was time for the EU finance minister DST public debate in the Council of Ministers meeting room. This time it was Swedish Finance Minister Magdalena Andersson who made it clear the DST was a dangerousmisconceived and unacceptable approach to taxation.

The approach of taxing turnover or revenue favors large countries over small ones,” she said. Even though she is only acting as a “caretaker” minister as Sweden tries to form a coalition government following elections in September, she went out of her way to make it clear that no matter what the make up of a future Swedish government: “there is widespread opposition in our parliament to the DST. This will not change”.

With Denmark and Sweden throwing the gauntlet down other countries including Malta, Cyprus, Ireland and Slovenia added their opposition.

And then there was Germany. Despite Le Maire trying every mating position possible to get German Finance Minister Olaf Scholz to team up and back the DST the opposition by German industry seemed to hold sway.

Not only has the German car industry made it clear the DST was a approach to taxation that would backfire but even industrial engineering giant Siemens came out on the eve of the meeting opposing the DSTGeorg Geberth, Siemen’s director of international tax, explained that the DST will make it hard for low margin companies with global annual turnover above 750 million euros such as Siemens to break into the digital tax business.

This tax will favor the high margin companies,” Geberth said. “It will narrow competition in a fast moving market.

As for the argument made the the European Commission and others that the EU DSTwould be better than having 11 or more different national digital turnover tax regimes – as are being planned by various EU member states – , Geberth was not persuaded.

It is much easier for a national parliament to repeal legislation to correct a tax law mistake than it is for the EU to repeal a tax law once there is a recognition it is a mistake. That is because it requires unanimity of all EU member states to appeal tax legislation,” Geberth said.

Facing that kind of heavyweight industrial pressure it was not a surprise that Scholz stuck to the line that an OECD approach on digital taxation was preferred. He also insisted that the sale of user data be eliminated from the DST scope and at the same time touted German support for a global minimum corporate tax rate at the OECD.

When it came time for his intervention, Le Maire recognized his month-long crusade to push the DST through the eye of the EU tax needle was in trouble. So he dropped the stick approach and offered a carrot. In exchange for approving the DST in December, Le Maire proposed to delay its implementation until 2021. And if the OECD reaches a deal on digital taxation in 2020, Le Maire said, the DST would never take effect.

Austria, eager to put a bow on its rotating six-month stint as EU rotating president that ends on Dec. 31, jumped on the plan. Finance Minister Hartwig Loger cited it as a winning compromise. He downplayed the conceptual DST opposition espoused by Jensen and the other EU countries. Their opposition was “interpretive” and “soft” Loger said.

I am confident with the French proposal to delay implementation we can get an agreement in December” Loger said.

However based on what Jensen, Andersson and a few others had to say, someone is calling someone’s bluff

We will find out in December.