No escape

EU targets US web giants with digital sales tax

Time to search for a tax advisor? Source: DPA

European finance ministers are fed up with companies like Facebook, Google and Twitter. The US internet giants are making more and more money from their European customers’ data, but none of it finds its way into government coffers. Because the web firms have no headquarters in the EU, local tax authorities don’t get a look in.

But now the European Commission, the EU’s executive arm, wants to change this and force web-based companies with global sales of €750 million ($916 million) or more to pay a digital sales tax. In an analysis of “taxation of digital activities in the single market,” dated February 26 and seen by Handelsblatt, it says all transactions generated by the “exploitation of user data” should be taxed. This includes revenues from the sale of data such as personal details and the provision of advertising space in social networks or search engines. The revenues of online marketplaces such as Uber or Airbnb should also be subject to the tax, the document adds.

The Commission has already drawn up a tax rate, which, according to the document, could range from 1 to 5 percent and should be uniformly defined for the entire EU.

Some member states, including Ireland and Luxembourg, have already indicated that they do not believe in an internet revenue tax.

The initiative is not entirely voluntary. French President Emmanuel Macron has been putting massive pressure on the Brussels authority since he took office last May. “Small and medium-sized businesses have to pay taxes yet Google pays nothing. It cannot go on like this,” said French Finance Minister Bruno Le Maire last week. Mr. Macron has declared the issue a top priority, and he plans to discuss it with his counterparts at the next EU summit at the end of March.

The Commission seemingly bowed to the massive pressure from Paris, although some in Brussels have voiced doubts. The document states that the Commission would prefer to take a global approach to digital taxation – within the OECD or G20 groups of wealthy nations. If this were the case, the profits of internet companies could be subject to corporate income tax. But the Commission concedes that it can take a very long time for the large industrialized countries and emerging economies to reach agreement. As a result, the document concludes that the EU cannot wait for this and must begin by seeking a “targeted interim solution.”

This interim solution is primarily intended to tap into revenues generated from user data sources. This means companies selling content such as films, games, software, e-books or financial services on the internet would not be taxed. As justification, the Commission writes that transactions involving user data only play a minor role in the sale of such content. This may not be enough for the French government, however. Last week, Mr. Le Maire called for the “broadest possible tax base” for the new digital tax.

A single authority, which is not specified in the document, would collect the tax throughout the EU. The revenue would then be shared out among the tax authorities of member states, dependent on where the value added was derived from the user data. This means that cash flows between US companies could also be taxed. As an example, the Commission cites a Coca-Cola advertisement that Facebook shows its European customers. The tax should be deductible from corporate income tax in the EU.

It is still unclear when the Commission will present the draft directive on a digital tax. And it is especially unclear whether and when such a directive will be adopted. Tax laws must be passed unanimously in the EU, and some member states, including Ireland and Luxembourg, have already indicated that they do not believe in an internet revenue tax.

Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. To contact the author:

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