EU Proposals on Digital Taxation: A divisive move?

In the last few years, digital companies have been in the spotlight, both in Europe and around the world, because of concerns from regulators, analysts and users that they might too often slip through the system from a regulatory and transparency standpoint.

Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, has recently stated that digital companies, while spearheading a “profound transformation” of our economies, also bring “unprecedented challenges” and reveal the inadequacy of corporate tax frameworks.

To fill this gap, “preserve a level-playing field […] and ensure fairness”, on 21 March 2018, the European Commission unveiled its highly-anticipated digital taxation proposals (two legislative proposals and a recommendation). The proposals notably aim to tax revenues rather than profits, a genuine revolution of the core principles of taxation. The proposal on the common system of a digital services tax on revenues set the Digital Service Tax (DST) at a rate of 3 percent, which will apply to advertising revenue, intermediation services and the sale of collected user data. This temporary tax will only be levied on companies with an annual global turnover of €750 million, €50 million of which must be in the European Union (EU) itself. Some digital companies will therefore be exempted from the DST, but the main question is: which ones? It has been reported that Amazon’s main activities will not be covered because of an exemption of some e-commerce activities. In the same vein, Netflix will also not be covered because of an exemption on subscription-based digital services. Yesterday the European Commission also presented a long-term solution by introducing a definition of digital presence in the current corporate tax reform (CCTB&CCCTB) in order to address issues surrounding the taxation of digital companies.

This initiative comes as no surprise. During the summer of 2017, French Finance Minister Bruno Le Maire strongly pushed for the taxation of big tech companies’ (GAFA) revenues. Soon afterwards, Germany, Italy and Spain joined France’s efforts in urging the EU to adopt legislation to tax companies operating in the digital economy. France’s perseverance in attracting additional Member States to the cause and the French Commissioner’s commitment to justice and fairness in taxation also played a role in bringing digital taxation to the top of the EU agenda. The conclusions of the September 2017 Digital Summit in Tallin confirmed Member States’ determination to further work on the subject at EU level.

Inside the EU, the digital taxation package has many supporters but also some significant opponents, led by Ireland and Luxembourg. This is critical considering that taxation proposals are subject to the unanimity rule in the Council. Moreover, while Mr. Le Maire managed to get the backing of many countries over the previous months, this initial support is starting to fade. Other options for taxation besides legislative proposals exist at EU level. Commissioner Moscovici has, however, firmly excluded the option of enhanced cooperation on this sensitive topic because it has not worked in past and has brought experiments such as the Financial Transaction Tax to repeated failure.

At the international level, the digital taxation package is also facing considerable criticism. Several commentators recently noted that the EU digital levy is designed to specifically target U.S. web giants, with Treasury Secretary Steven Mnuchin stating that “the U.S. firmly opposes proposals by any country to single out digital companies.” He confirmed his commitment to “fully support(s) international cooperation to address broader tax challenges arising from the modern economy” but clearly not to the extent of backing such a strong move by the EU.

Yesterday, during a press conference, Commissioner Moscovici unconvincingly reiterated that this interim tax is not a “GAFA tax.” Yet, the timing of the proposal remains far from ideal. There is, in fact, a risk that the United States could be tempted to tie the DST to the sensitive issue of tariffs on steel and aluminium while the EU is currently trying to negotiate an exemption.

The ambitious timeline for adoption (expected by the end of 2018) adds more complexity to the mix.

One additional question remains: can the EU afford a potentially significant divide on the digital taxation file at a time when unity among Member States is needed more than ever?