EU Finance Chiefs Urged to Use Digital Tax to Fill Brexit Hole

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By Joe Kirwin

European Taxation Commissioner Pierre Moscovici insisted a temporary digital tax on large internet companies such as Alphabet Inc.'s Google and Facebook Inc. was an ideal way for the European Union to overcome a post-Brexit budget battle that will begin on May 2.

Faced with mounting opposition from EU member nations to the controversial 3 percent levy on advertising revenue and intermediary fees, Moscovici said the tax would not only calm tax fairness concerns but it would ease the budget hole of as much as 10 to 11 billion euros ($13.4 billion) expected once the U.K. leaves the European Union. The European Commission is set to release a multi-annual spending framework on May 2.

“We estimate the temporary digital tax would raise 5 billion euro in revenue,” said Moscovici April 28 at the conclusion of EU finance minister meeting held in the Bulgarian capital of Sofia. “The departure of the U.K. will cause a budget loss of between 10 and 12 billion euro. The digital tax is an ideal way to help close that gap.”

Countries Wavering on Commitment?

Moscovici’s comments come after two weeks of intensive efforts, along with French Finance Minister Bruno Le Maire, to get EU finance ministers to support the temporary digital levy and commit to an agreement by the end of 2018.

“This issue is about Europe having the courage to defend its independence,” Le Maire said in reference to his insistence that it was essential to challenge the U.S.-based “internet giants.”

By all accounts, the Gallic efforts fell flat. Not only did countries such as Ireland remain opposed but others raised some concerns, including the U.K., which had previously signed a letter supporting the levy.

“The United States will see this tax as an attack on U.S. companies,” warned U.K. Chancellor Philip Hammond. “We have to find a global solution to this issue of taxation for the digital economy.”

German Silence

In the case of Germany, silence spoke volumes. German Finance Minister Olaf Scholz neither spoke during the meeting nor endorsed the initiative at a joint April 29 press conference with Le Maire.

While the pressure from the European Commission and France didn’t win over holdouts, it did get the attention of Organization for Economic Cooperation and Development Secretary General Angel Gurria. þHe told EU ministers the Paris-based group will now release a report digital tax reform in 2019 instead of 2020. However he also insisted during a meeting intervention that this “issue is too important to be urgent.”

Misguided Efforts

Fredrik Erixon, the director of the European Centre for International Political Economy, told Bloomberg Tax that Moscovici and Le Maire’s strong-arm tactics were misguided.

“Using a highly moralistic tone when the main effect of the tax is to redistribute revenues from all economies to bigger economies is counter productive and only makes you look arrogant,” Erixon told Bloomberg Tax in an April 30 email.

Should the 3 percent digital tax levy fail to get the unanimous support of all 28 EU member nations, some insist it has a future via the EU’s “enhanced cooperation” legislative procedure because it is aligned with the destination principle and levied where consumers and users of the respective services are located.

However Werner Haslehner, a University of Luxembourg professor of international tax law, challenged that assumption.

“Introducing the tax in only some member states will inevitably create further distortions within the internal market that the Commission is trying to resolve,” Haslehner said in an April 29 email.

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

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

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