Design of EU’s Big Tech Revenue Tax Comes Under Friendly Fire (1)

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By Ben Stupples

The European Union’s plans to impose a new tax on the revenue of internet-based companies like Facebook Inc. and Google Inc. have come under fire from member states’ government officials.

At a July 2 University of Oxford business tax conference, British, Irish, and German finance department officials cited the range of the European Commission’s proposal as an issue for them.

Christoph Wicher, tax policy adviser at Germany’s Ministry of Finance, said the digital services tax proposal “does not define precisely enough which digital business models should fall within the DST and which do not.”

His Irish counterpart concurred. “At a high level, we do have ongoing concerns about various elements, like scope,” said Brendan Crowley, head of international tax at Ireland’s finance department. Overall, the EU’s plans may pose a “negative impact on global trade relations, an increasing risk to global tax, and further disruption of the digital single market,” he added.

Physical Presence

Internet-based companies’ lack of physical presence, together with how they often derive huge profits from user-generated value, has created issues for tax authorities across the globe.

Globally, lawmakers are currently split on how to tax internet-based companies like Alphabet Inc.’s Google.

The OECD is aiming to find worldwide consensus on the issue in 2020. Ahead of that date, however, the EU’s executive arm in March proposed a temporary tax on the revenue of social media and search engine companies, and online platforms like eBay Inc.

Set at 3 percent, the tax would target revenue streams where users play “a major role” in creating commercial value for these companies, according to a March 21 news release.

The European Commission’s levy applies to businesses with global annual revenue of at least 750 million euros ($870 million), and annual EU revenue of more than 50 million euros. Overall, the measure is expected to raise as much as 5 billion euros a year, the release said.

Policymakers are opting for revenue-based levies on digital companies, as sales are easier for tax authorities to pinpoint as user-generated value in their jurisdiction in comparison to profits. Countries including India and Italy have already proposed revenue-based taxes.

“This interim tax ensures that those activities which are currently not effectively taxed would begin to generate immediate revenues for Member States,” the commission said March 21.

U.K. Treasury Stance

Reflecting the European Commission’s efforts, the U.K. Treasury signaled last year that it would be prepared to introduce a temporary tax on the revenue of internet-based companies.

Yet the range of Britain’s proposal differs to what the European Commission has outlined, Tim Power, deputy director of the U.K. Treasury’s corporate tax team, said July 2.

“We see there are good arguments, if permissible in treaties, to actually define business models that this tax would apply to, rather than defining revenue streams,” Power said in a panel discussion of countries’ views on the European Commission’s plan.

Last month, in addition, Power said the U.K, Treasury was “actively exploring ways of softening the edges of a revenue-based tax.”

In response to criticism of the digital service tax’s scope, European Commission officials have stressed that their policy is carefully assessed, possessing a well-defined scope based on an analysis of several business models.

Equally, officials have welcomed the involvement of EU member states to reach a common understanding on these sort of issues.

Temporary Measure

In March, the commission stressed that its levy would only remain in place until member states achieve more wide-reaching action to reform the way countries allocate and tax digital companies’ profits.

Since then, though, smaller countries like Luxembourg and Ireland have argued that the bloc risks putting itself at a competitive disadvantage unless a global deal is reached on the taxation of the digital economy.

The opposition is significant as the European Commission needs member states’ unanimous approval to introduce tax issues.

At the Oxford conference, however, officials ultimately adopted an optimistic outlook.

“We’re opened-minded about finding a long-term solution,” Crowley said in the panel discussion. “It just needs to be economically justifiable and politically acceptable.”

“Ideally, a global agreement will be so holistic that we don’t need to revisit the issue in the future,” added Wicher.

To contact the reporter on this story: Ben Stupples in London at bstupples@bloombergtax.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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