EU Ministers Face Familiar Digital Tax Dilemma: Who Should Pay?

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By Joe Kirwin

For five years, efforts to establish a taxation model on the booming digital economy, including plans from the OECD, have met various obstacles, but none more formidable than the question of what should be taxed and who should have to pay it.

That dilemma resurfaced at a Sept. 16 meeting of European Union finance ministers as 10 countries pushed for an EU “equalization” turnover tax on the “internet giants”—as French Finance Minister Bruno Le Maire refers to companies such as Google Inc., Facebook Inc. and Amazon.com Inc. Le Maire wants the turnover tax as an interim solution until the OECD and the EU can work out a long-term plan.

‘The key problem with a turnover tax for the digital economy is defining ‘what do you tax’,” said Dutch Finance Minister Jeroen Dijsselbloem. “Is it services, data mining, advertising revenue? And when you do you tax it?”

Strange Bird

Swedish Finance Minister Magdalena Andersson went further. She told journalists Sept. 16 the turnover tax concept for digital companies was a “strange bird” in the global tax system.

“If you have a turnover tax, you de facto move the taxation to the consumer market,” said Andersson. “For an export country like Sweden, with a fairly small population with many big companies, it is not obvious that this is in our interest.”

The Swedish finance minister added that in a “similar way, a Frenchman can think it is odd that we sell a lot of Volvo cars in France but are not paying any taxes in France but in Sweden.”

Irish Finance Minister Paschal Donohoe, whose country has resisted many EU tax initiatives over concerns they usurp national tax policy sovereignty, said he was not only opposed to a turnover tax but that it would not work even if there was one.

“What became clear is that there are very, very considerable difficulties in taxation in this sector,” Donohoe told journalists after the Sept. 16 meeting. He added that defining the digital sector alone is a major challenge “because we now have economies that are digitized as opposed to parts of the economies that are digital.”

Donohoe also emphasized the global nature of the digital economy and therefore that any taxation solution must come via the Organization for Economic Cooperation and Development.

“It has to be done on the basis that recognizes that digital transactions are now an inherent part of the entire economy,” Donohoe said. “And that is why the OECD is the appropriate forum and most effective way to address this issue.”

U.K. Warns

While it will no longer be a member of the EU as of March 2019, the U.K. also insisted that not only is the OECD the right place to find solutions on digital taxation issue because of the difficulties in defining a scope, but that if the EU doesn’t pursue the multilateral solution it risks alienating the U.S.

“It is important that we keep the U.S. engaged,” Chancellor of the Exchequer Philip Hammond told his fellow ministers at the meeting, according to an EU official who was present. “The leading digital companies are American.”

Hammond also emphasized that a turnover tax and other types of taxation are difficult because, among other things, “taxation of advertising does not account for the value of free services” that internet companies provide.

Besides scope issues, EU finance ministers at the meeting, as well as various academics and tax experts contacted by Bloomberg BNA, say they are concerned about double taxation. Moreover, according to German tax law professor Joachim Englisch of the University of Muenster, it would be U.S. companies that would be double taxed.

“Depending on how the tax is designed, its imposition could breach tax treaties and, in any event, could provoke equally uncoordinated retaliation from other jurisdictions,” Englisch told Bloomberg BNA in a Sept. 17 email. “Hence, I think it is necessary to forge agreements within the OECD, especially by including the U.S. Otherwise there is a major risk to one of the most innovative and productive parts of the economy.”

Lampost Phenomenon

J. Scott Marcus, a senior fellow at the Brussels-based Bruegel Institute and an expert on the digital economy and electronic communications issues, told Bloomberg BNA the turnover tax approach suffers from the “lamp post” phenomenon where one looks for something lost only because that is where the light is.

“There is a desire to tax turnover because we can measure it somewhat, not because it is the right thing to tax,” Marcus told Bloomberg BNA in a Sept. 18 email.

Despite the skeptics, Le Maire made it clear that moving ahead with an interim digital turnover tax measure is a crucial component of new French President Emmanuel Macron’s push to reform the French economy.

“It is impossible to convince the French people of the need to make labor market reforms if the internet giants are not paying tax,” Le Maire said at a Sept. 15 press conference.

In the days leading up to the Sept. 16 meeting, Le Maire was able to convince nine other countries to support a digital turnover tax as an interim approach until a long-term plan such as pending EU corporate tax reform known as the common consolidated corporate tax base (CCCTB) can be agreed .

“We would like to move ahead quickly at the EU level,” the 10 countries said in a letter released Sept. 16. “Therefore we ask the European Commission to explore EU law compatible options and propose any effective solutions based on the concept of establishing a so-called ‘equalization tax’ on the turnover generated in Europe by the digital companies.”

“The aim is to reflect some of what these companies should be paying in terms of corporate tax,” the letter said.

Virtual Permanent Establishment

Since it took over the rotating EU presidency in July, Estonia, which has one of the most advanced nternet-oriented economies in the EU, has pushed the idea of a “virtual” permanent establishment approach for dealing with taxing digital companies. This could be done, Estonia says, via amending the CCCTB or, if that can’t be achieved, as stand-alone legislation.

“Estonia is of the opinion that when bringing the tax rules up to date, it is important to abandon the requirement that companies have to be physically present in a country or own assets there and replace this with the concept of a virtual permanent establishment,” Estonian Finance Minister Toomas Toniste said Sept. 16 at a news conference that closed the Sept. 16 meeting.

He added, however, that “a precondition for this is a more precise agreement on the virtual taxpayers who have to start paying taxes.”

In other words, even with a a modern, digitally oriented approach such as a “virtual” permanent establishmentapproach, the key question of who should pay the tax is still unanswered.

Toniste and the Estonian presidency said they hope to lead EU finance ministers to an agreement in the Council of Economic and Financial Affairs on the best digital taxation approach by the end of 2017. The European Commission will follow up with a legislative proposal in the first part of 2018.

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

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

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