On 21 March 2018 the European Commission unveiled legislative measures designed to ensure digital businesses pay their “fair share” of tax in EU member states. The measures are billed by the Commission as “fair and growth-friendly” – but criticism is already mounting that the plans are discriminatory and could harm the EU’s digital economy. As the US and business groups weigh in, and with the international OECD Base Erosion and Profit Shifting (BEPS) project still ongoing, are the EU jumping the gun?
The Commission proposal has two main strands:
One: a Directive laying down rules relating to the corporate taxation of a significant digital presence
- This Directive begins revising EU tax rules to create a new concept: Significant Digital Presence (SDP). This, alongside Permanent Establishment (PE) status, will determine which companies can be taxed in the EU.
- The most relevant details are in Articles 3 and 4, where they establish the criteria for determining a business’s “digital footprint” in a jurisdiction. The key factors: if the revenues from providing digital services to users in a jurisdiction exceed EUR 7 000 000 in a tax period, if the number of users of a digital service in a member state exceeds 100 000 in a tax period, or if the number of business contracts for digital services exceeds 3000.
Two: a Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services
- The reforms outlined above will take a long time to negotiate and enact, so the Commission has simultaneously brought forward plans for a Digital Services Tax (DST), an interim measure to tax the revenues of digital firms who rely on user value creation. This captures business models that require user involvement; essentially, online platforms which rely on user-generated content and interaction.
- The Commission has stipulated three broad types of digital revenue generation which should fall in scope: i) selling advertising space on a digital platform, ii) providing “multi-sided digital platforms” which allow users to interact with other users, for example by allowing users to directly exchange goods and services, and iii) selling raw data collected about users during their activity on the platform.
- If no revenues are generated from supplying these services, there’s no new DST liability. Revenues generated from the provision of digital content (including computer programmes, applications, music, videos, texts, games and any other software) are explicitly excluded from the scope of the tax.
Commentary and reaction
The Commission had been confident of broad support in Council for these plans, driven by Franco-German cooperation. However, as reported in Politico, German government officials are apparently wavering, worried that new tax measures could spark retaliatory action from the US in the form of import tariffs on Germany’s auto manufacturers.
Silicon Valley has already come out swinging, enlisting its various lobbying arms to oppose the new tax and using US Treasury Secretary Steven Mnuchin as a mouthpiece to speak out against the tax. Mnuchin said that “the US firmly opposes proposals by any country to single out digital companies” and, as the FT points out, “one diversionary tactic is to entangle the tax with other transatlantic disputes, including that over US steel and aluminium tariffs.” House Ways and Means Chairman, Kevin Brady, an influential lawmaker on tax, has followed Steven Mnuchin’s assertive stance, saying that the EU’s effort to tax tech companies is just another example of the EU going after US companies.
Reacting to the DST proposals, Business at the OECD (BIAC) called for a general agreement on a consistent tax framework for all companies, while warning EU policy-makers that international taxation is at risk of fragmentation, which could reduce economic growth and job creation. Will Morris, Chair of the BIAC Committee on Taxation and Fiscal Affairs, stated that “we strongly encourage the European Commission to work with the OECD/G20 Inclusive Framework to help develop a global consensus through a broad multilateral process that includes all stakeholders.”
Short-term gratification or long-term reform?
Proposals of this kind have emerged several times in recent years and failed to come to fruition. This time, though, plans have more momentum. Significantly, while the UK previously vetoed measures to consolidate the tax base across EU countries, the UK is now one of the most active proponents of an interim solution to increase the tax yield from the digital economy.
More problematic is that the original champions of the OECD BEPS project, an enormous multilateral project to combat tax avoidance with over 100 countries involved, no longer seem willing to wait for it to come to fruition, which begs the question of why the international community should engage in lengthy multilateral reform if the EU will go off and do their own thing anyway. In pushing interim solutions, EU countries may find that they sow the seeds of discord which ultimately undermine international efforts to create a new corporate tax framework which properly accounts for value creation in the digital age.