Digital Tax

The long arm of the EU tax man

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The gold rush may be over for Amazon, Apple & Co. Source: Shutterstock/Artisticco

Google, Amazon and other tech companies selling products and services over the internet could soon face a substantially higher tax bill in Europe. European Union finance ministers, meeting Saturday in Tallinn, Estonia, discussed a proposal that would require online giants such as Apple and Facebook to pay tax in the countries where they earn revenue, rather than where they book profits.

The proposal comes amid increasingly vocal public anger over American digital companies skirting taxes by routing most of their profits to low tax-rate countries, such as Ireland and Luxembourg. In the digital age, said Estonia’s Finance Minister Toomas Toniste, “the current taxation system no longer applies and that is why we have to find another solution.”

France is leading the charge for the digital sales tax. French Finance Minister Bruno Le Maire referred to the measure “as a question of fairness.” It won the support of 10 of the 28 EU members states, including Germany, Spain, Italy and Austria, with most states agreeing in principle to the need for more effective taxation of digital companies.

A report published ahead of the meeting by EU lawmaker Paul Tang estimated that Google, whose European headquarters and tax base is in Ireland, paid taxes not higher than 0.8 percent of its EU revenues between 2013 and 2015. Facebook, which is also based in Ireland, paid even less, with a ratio as little as 0.1 in the same period, and Luxembourg-based Amazon paid nearly no taxes at all after reporting no profits.

But divisions emerged on how to go about taking on the online giants. Not surprisingly, Ireland and Luxembourg showed little interest, as did Malta, Sweden and Denmark, fearing that a tax in Europe could push the companies to set up shop in Asia. “I think we should be very careful not to tax on what we are going to live on in the future,” said Danish Finance Minister Kristian Jensen, adding that Europe already “taxes heavily enough.”

“I think we should be very careful not to tax on what we are going to live on in the future.”

Kristian Jensen, Danish Finance Minister

Still a member of the bloc with a vote and a voice, Britain said it was worried about a possible American reaction that could endanger current schemes to combat corporate tax avoidance, in particular the so-called BEPS, or the base erosion and profit-sharing  program of the Organization for Economic Cooperation and Development.

Many European governments are reluctant for the EU to go it alone on tax avoidance. They prefer international cooperation instead to stop companies from moving their business to low-tax countries. In Tallinn, OECD head Angel Gurria said that, in principle, the proposed digital tax does not contravene the organization’s rules against tax avoidance and profit shifting. In an interview with Handelsblatt, Achim Pross, the OECD’s tax expert, said that while the BEPS program is designed “to stop companies avoiding tax in different countries,” the EU debate goes further by looking at how to divide up tax revenues in cases where a company has no legal presence in a country where it does business.”

If the OECD doesn’t reject the proposal, EU finance ministers want to decide at their summit in December whether to pursue the sales tax. If so, the European Commission, the executive arm of the EU, should propose new legislation in early  2018. The Commission is already working on draft paper offering five different options for taxing internet companies, including the sales tax. Alternative methods include integrating internet companies into EU plans for a more unified corporate taxation regime.

German Finance Minister Wolfgang Schäuble said he preferred a global tax on profits but acknowledged that it would take too long to implement, if it were possible at all. The EU, he argued, can no longer accept tax avoidance by large companies simply because they operate online.

One complicating factor for Germany is that while companies in the country largely support a digital tax, many are opposed to a part of the BEPS process known as “country-by-country reporting.” Under these OECD rules, multinational companies have to provide a detailed breakdown of their profits and revenues in each country in which they operate. The rules are intended to prevent tax avoidance and provide information to authorities worldwide.

“We’ll decide in December if a European digital sales tax will work.”

Wolfgang Schäuble, German finance minister

German firms say the rules would put them at a competitive disadvantage with foreign companies not subject to such governance. “Companies would suffer greatly if Chinese companies, for example, had free access to the data of the German competitors, but with no obligation to publish information themselves,” said Lars Grünert, chief financial officer of the German tool manufacturer Trumpf. Mr. Schäuble is opposed to mandatory publication of country-by-country data, but other members of his government have spoken in favor.

Whether Europe ever introduces a digital sales tax remains to be seen. Decisions on taxation law need unanimous approval of all 28 member states. That is a difficult task and one that could prove to be a slow to achieve, if at all. Rumors surfaced in Tallinn of a smaller group of countries possibly imposing the tax on their own. For this so-called “enhanced cooperation” method to work, nine EU countries need to agree to participate. Commission Vice President Valdis Dombrovskis didn’t rule out the possibility.

Given such obstacles, Mr. Schäuble hinted for the first time that he wasn’t opposed to changing EU’s policy of unanimity on taxation law and applauded Commission President Jean-Claude Juncker recent comments on considering changes. Now Mr. Juncker, the former prime minster of Luxembourg, will only need to convince his landsmen that it’s a good idea.

 

Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. Donata Riedel covers economic policy for Handelsblatt. John Blau is a senior editor with Handelsblatt Global. To contact the authors: berschens@handelsblatt.com, riedel@handelsblatt.com and blau@handelsblatt.com

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