Trends to Watch 2019: Digital Tax in the EU Gets Real

Digital tax saw two European Commission proposals in March 2018 and the issue has only grown in prominence since then. In 2019, technology companies will face growing momentum behind efforts to introduce national levies on the digital sector, continuing and politicised EU-level interventions as we approach the European Parliamentary elections, and preparations for the Organisation for Economic Co-operation and Development (OECD) proposals on a global digital tax solution.

Debate around digital tax sparked two European Commission proposals in March 2018 and the issue has only grown in prominence since then. In 2019, technology companies will face growing momentum behind efforts to introduce national levies on the digital sector, continuing and politicised EU-level interventions as we approach the European Parliamentary elections, and preparations for the Organisation for Economic Co-operation and Development (OECD) proposals on a global digital tax solution.

EU-wide digital tax falters

The EU came out of 2018 with their “interim digital services tax” — a temporary levy on certain digital services not currently covered by EU rules — blocked by a coalition of Ireland, Sweden, Denmark and Finland.

France had been a vocal proponent of the tax, but was increasingly isolated as the Nordic countries led opposition, arguing that the focus on taxing revenues where value was created would favour larger countries with more online service users.

Other member states had more fundamental criticism of the plan; concerns about impact on major tech companies headquartered in their jurisdictions were prominent. Others, with a cautious eye on the US and the prospect of renewed trade wars, agreed that finding a global-level solution to taxing the digital economy would be more productive.

French economy minister Bruno Le Maire, one of the strongest supporters of the tax, was forced back to the drawing board, where he drafted a proposal with his more reluctant German counterpart, Olaf Scholz. The two countries proposed a much narrower EU level digital tax, targeting the advertising revenues of digital companies and excluding several tech giants, including Amazon and Spotify. The proposals would only come into place if international proposals weren’t agreed by 2021. However, despite aiming to address concerns from the Nordic coalition, the measures have been criticised by previous supporters for not going far enough, and Le Maire agreed he would give the EU until March 2019 to come up with a solution that the EU-28 could accept.

Member states diverge

France then reneged on that promise and announced its own digital tax regime would be introduced on 1 January 2019.

A tax had been a campaign pledge for Macron, and ahead of the European elections has become a defining issue for En Marche’s campaign as the President tries to show his reform agenda can bring real benefits. Now, after mass protests from the Gilet Jaunes movement and large budget allocations to try and placate them, the French government sees taxing major technology companies as a way to reduce a swelling budget deficit, redistribute purchasing power, and win popularity with voters.

France claims to remain committed to an EU-level solution. Meanwhile, Italy will probably be next to introduce its own tax. The country had already passed a law introducing a tax, but its implementation had been postponed in favour of finding an EU solution. Spain and the UK, both of which have put forward national proposals, are likely to follow.

What’s important for 2019?

The fragmentation of the EU’s tax landscape means that digital companies may find themselves in and out of the scope of different measures. Tech companies in scope are likely to try to pass their costs down to their customers, which could include other, smaller digital companies. Taxing revenues could also lead to double taxation of digital businesses.

Despite the flurry of national taxes due for 2019, work on an EU-wide solution is set to continue. The push for a digital tax may well be strengthened by the European Parliament elections in May 2019: we can expect to see political parties from across the spectrum calling for a clampdown on tax avoidance and putting forward suggestions for taxing major digital companies.

Internationally, the OECD will develop a work programme on digital tax for 2019 and is due to issue proposals in 2020. Many EU member states, including Germany, would prefer an OECD agreement and will cooperate on any proposals the organisation puts forward.

What are the policy challenges?

  • The fragmentation of the EU’s digital tax landscape is the greatest policy challenge facing businesses operating in the EU. Digital companies should make this a key subject of engaging with policy-makers.
  • Digital businesses can provide constructive contributions to the debate, explaining the difficulties of separating the digital economy from the wider ecosystem and highlighting the risks of double taxation.
  • The focus for policy engagement should be on rejecting the idea of an interim tax and emphasising the need to develop an OECD-level, profit-linked tax that avoids double taxation and continues to support innovative EU businesses.

Author: Kirsten Williams, Policy Analyst, Access Partnership

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