EU Countries Seek Legislative End-Around on Digital Tech Tax

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

By Joe Kirwin

EU nations led by France and Italy reinforced the need for an “equalization tax” or turnover tax on large internet companies such as Facebook Inc. and Amazon.com Inc., and suggested they would use special legislative procedures to impose one in the event all 28 EU-member countries don’t back the levy.

French President Emmanuel Macron, speaking Sept. 29 at a special EU summit in Estonia dedicated to the digital economy, emphasized that a turnover tax on tech “giants” is necessary to even the competitive playing field in the EU and to relieve the tax burden on traditional companies large and small.

“The equalization tax is a necessary short-term measure needed to ensure that large internet giants pay taxes where they earn their profits,” Macron said at a news conference at the conclusion of the summit in the Estonian capital. He added that the tax revenue from big tech companies is needed to help finance the digitalization of all sectors of the economy.

Reinforced Cooperation

Italian Prime Minister Paolo Gentiloni told journalists the countries in favor of the equalization tax should use a special “reinforced cooperation” procedure that allows at least nine countries to bypass EU rules requiring the unanimous agreement of 28 countries when it comes to tax legislation.

“If there is not unanimous agreement among the 28 EU countries, we should pursue reinforced cooperation in order to adopt the web tax,” Gentiloni said.

Currently, 10 EU-member countries are using the reinforced cooperation procedure to pursue a financial transactions tax. Negotiations have been ongoing for more than five years.

Even before the the EU summit discussion on the digital economy began, Ireland, Cypress and Malta made it clear they won’t support an equalization tax.

Ireland Objections

Pre-empting the EU leaders’ discussion, the three EU member states—all with low corporate tax rates—told Bloomberg BNA the EU must seek a global solution via the Organization for Economic Cooperation and Development.

The Cyprus Ministry of Finance said in a Sept. 29 email that OECD’s 2015 Action Plan on Base Erosion and Profit Shifting will “substantially address the BEPS issues aggravated by the digital economy, with the aim of putting an end to the phenomenon of so-called stateless income.”

The Cyprus finance ministry also said the equalization tax “does not seem to exclude the companies that are established within the EU, which will essentially distort EU competitiveness and hamper the functioning of the internal market.”

Just as important, the Cyprus ministry said, the idea of an “equal tax” may violate EU treaty provisions guaranteeing national sovereignty when it comes to tax.

The Maltese government told Bloomberg BNA in a Sept. 28 statement, before EU leaders took up the issue in Estonia, that “given the global aspect of our economies and the work that is already being carried out within the OECD on this, Malta believes that any action emanating from the EU should be directed at reinforcing the said work that is being carried out by the OECD.”

The Irish Ministry of Finance echoed the words of Cyprus and Malta.

“It would be premature to take action without considering the OECD analysis, and for that reason Ireland is not supportive of proposals to move ahead of the OECD process,” it said in a Sept. 29 statement emailed to Bloomberg BNA. “A consistent approach is needed as these digital companies are global in nature. Applying different rules within the EU to what is being applied globally is likely to result in double taxation and greater uncertainty.”

Short-Term Solution

France, Germany, Italy, and Spain are pushing the EU to commit to the equalization or turnover tax as a short-term solution to force large internet companies to pay more in tax. They want the EU to adopt the tax as a quick-fix measure until the work in the OECD on digital taxation is agreed.

“For companies that shift to third countries, their taxable profits earned in the internal market, to repatriate to the EU the portion of tax base that is unduly transferred offshore, the EU could explore options for a digital equalization levy,” the four EU countries said in a position paper they submitted for the digital economy summit.

EU finance ministers are due to make a recommendation on the equalization tax in December. The European Commission is due to make a legislative proposal in the first half of 2018 based on what is recommended by EU member nations.

European Commission President Jean-Claude Juncker told journalist at the conclusion of the summit that he expects an agreement to be reached in December. However, he also said earlier in the day that he expects the commission proposal to contain an equalization tax.

To contact the reporter on this story: Joe Kirwin in Brussels at correspondents@bna.com

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

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax