EU Countries Clash Over Digital Tax Structure

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By Joe Kirwin

European Union member nations are still split over key details underpinning its proposed tax on large internet companies like Alphabet Inc.'s Google and Facebook Inc.

EU presidency holder Austria had hoped to smooth some disagreements in a July 18 meeting, laying out specific topics to be discussed such as the rate and scope of the tax and definitions needed to administer it. But even after eight hours of technical discussions, members remained divided over those elements.

The 3 percent tax is meant to be a temporary measure until the bloc comes to a more permanent agreement, but the tensions seen in negotiations so far throw that goal into question—and finding a solution is critical to the EU’s goal of strengthening its taxation of multinational companies. Austria has said it hopes to have an agreement by the end of the year.

Division Over Definition

An EU diplomat who participated in the July 18 said the countries are also still split over the definition of targeted advertising, a detail that is critical because the proposed tax would apply to revenue from “the placing on a digital interface of advertising targeted at users of that interface.” Some countries want a broad definition “to keep the administration simple and to avoid loopholes,” the diplomat said.

“Other countries are in favor of narrow definition,” the diplomat said. “One country insisted that using targeted online advertising was the wrong scope approach and that it should be based on business models such as social media or search engines,” the diplomat said.

In the lead-up to the meeting, Austria proposed two different approaches to the definition. A narrow definition would define targeted advertising as being aimed at individual users based on data collected on them. A broader definition would include all online advertising.

France, Italy, Spain, and Hungary were the leading proponents of the wide definition while Ireland, the Netherlands, Germany, Belgium, and Poland backed a narrow approach, according to EU diplomats in attendance.

Scope Questions

Another unresolved question is whether the scope of the tax should include the sale of user data. Some EU member nations insist this creates a risk of the same data being taxed multiple times.

But Dmitri Jegerov, Estonia’s undersecretary for taxation, said the sale of user data should be included in the scope.

“We see this deletion as a risk for major re-classification of a tax object and a potential loophole,” Jegerov said in a July 19 email.

The bloc also considered a new “allowance” approach to overcome differences on the proposed thresholds for the tax. The levy applies to businesses with global annual revenue of at least 750 million euros ($876 million), and annual EU revenue of more than 50 million euros.

“The allowance would provide tax exemptions to the first 50 million euros of revenue to companies that meet the two threshold criteria,” an EU diplomat said. “It is designed to prevent the cliff edge effect where a company that meets the criteria is hit with a big tax bill whereas a company just under does not have to pay the tax.”

Jegerov said the allowance approach is a possible solution but needs more consideration.

“It seems to address in a way the same issue we have been raising about tax neutrality risks,” Jegerov said.

Pawel Gruza, the Polish undersecretary of state, told Bloomberg July 19 that the country believes the rate of tax should be adjusted to income.

“The problem with the 3 percent rate is that it would be the same for all eligible companies no matter how profitable they are,” he said.

Gruza also said that Poland will insist that the tax, if it is approved, includes a provision that gives a clear message to eligible companies that they will be exempted if they alter their business model and commit to pay corporate taxes on profits in the member nation where they are generated.

“After all that is what the overall goal is behind this temporary transaction tax,” Gruza said.

OECD Departure

Some member nations, academics, and companies have criticized the tax because it departs from ongoing work in the Organization for Economic Cooperation and Development.

BusinessEurope, the largest business lobbying group in the EU representing more than 10,000 companies, echoed that criticism in a position paper released July 19.

“We are concerned that the European Commission’s proposal for a short-term solution for a Digital Services Tax (DST), breaks with the international convention of taxing company profits not revenue and thus risks increasing double taxation of companies as well as damaging our competitiveness, jobs and investment if applied unilaterally in the EU,” BusinessEurope said in its position paper.

The European Commission insists companies won’t be taxed twice because the digital tax can be offset against their corporate tax bill.

To contact the reporter on this story: Joe Kirwin at correspondents@bloomberglaw.com

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

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