The European Union published proposals Wednesday for a 3 percent Digital Turnover Tax on the European B2B revenues of digital giants such as Google, Apple, Facebook, Amazon (termed GAFA in Europe), Uber and Airbnb.
This controversial levy breaks global tax accords, in place since the 1920s, as it targets gross sales rather than profits. The DTT will hit an estimated 100 businesses, and according to the EU could raise $6 billion on digital platform services and advertising. This will go some way toward rebalancing the billions in U.S. offshore earnings already being repatriated to the U.S. following the December federal tax reforms. It also comes as Europe and the rest of the world consider how to retaliate against the US steel and aluminum tariffs.
DTT is also set to clash with draft international digital tax reforms published on March 16 by 113 countries under the auspices of the Organization of Economic Cooperation and Development. The OECD countries seek an international long-term settlement on cross-border digital trade. However, within hours U.S. Treasury Secretary Steven Mnuchin sounded doubts about even this broad coalition, raising concerns that it was taxing U.S. digital companies.
A brick-and-mortar global tax system not fit for a digital 21st century
The current international tax regime, which casts rules to avoid double or no taxation of cross-border trade, was largely created with the post-World War I settlement. However, in the past 10 years, it has been exposed as not keeping up to date with the ability of digitally based companies to readily sell their services in foreign countries without needing to establish locally taxed subsidiaries.
In Europe, the large U.S. digital giants, including the GAFA, have based their EU headquarters in the low-tax corporate income tax states such as Ireland and Luxembourg. Under the EU Single Market rules, they are then free to sell to companies and consumers in any of the 28 member states without paying local businesses taxes. In addition, by deploying complex, but legitimate intellectual property tax structures, the digital firms have reduced their average tax rates from 23.3 percent to 9.5 percent, according to the EU.
EU wants to equalize fiscal deficit
The EU DTT, or “equalization tax,” is a temporary response to this fiscal position. It seeks to address the inability of national tax authorities to fairly tax U.S. firms making billions of untaxed sales in their countries. The levy would extend the tax net to three revenues:
1. Advertising space offered by companies like Google, Facebook and YouTube;
2. Intermediate services on person-to-person transaction platforms like Uber and Airbnb; and
3. The sale of customer data and activities.
DTT was sponsored by France and has since gained backing from Germany, Spain and Italy.
It is an interim proposal, only to be deployed until longer-term plans on global digital taxes are agreed upon. This would include a corporate income tax based on a significant digital presence which would replicate the current “permanent establishment” concept used in existing global tax treaties.
EU tax ambitions hit small country obstacles
To pass into law, the tax would need a unanimous vote by all 28 EU member states. So far, only 19 have agreed. Countries like Ireland, the Netherlands, Sweden and Luxembourg, homes of many U.S. tech companies, will seek to block the resolution. They will cite the complexity and legal uncertainty of imposing a sales tax which rides against decades of international tax accords. Even the EU says, “We are nonetheless aware that such a short-term measure is sub-optimal and has a series of drawbacks and limitations.”
But the large and powerful block of France, Germany and Italy could still go it alone under the EU’s Enhanced Cooperation mechanism. This only requires nine member states’ agreement to proceed and enter into EU law.
U.S. skeptical as 113 countries struggle to reach 2020 compromise
A wider group of 113 countries on March 16 agreed to work toward a global consensus by 2020 on the same problem — taxing digital businesses across borders. Under the guise of the OECD, an interim tax reform report confirmed countries will look to develop a formula that taxes fairly where digital companies do not have sufficient or any physical presence in a country to trigger corporate income tax liabilities.
However, after the release of the report, Secretary Mnuchin immediately repeated opposition to any reforms that targeted U.S. digital companies.