EU Parliament Backs Digital Corporate Tax Reform

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By Joe Kirwin

The European Parliament approved corporate tax reforms aimed at ensuring Amazon, Google and other large internet companies pay tax in the EU where profits are earned.

The changes, approved March 15 by 438-145 votes in the parliament, contain some of the long-term digital tax features the European Commission will unveil March 21.

“The steps we have taken today represent an important opportunity to make a giant leap in the field of corporate taxation,” said French lawmaker Alain Lamassoure, a sponsor of the European Parliament amendments and a prior French finance minister. He added that the measures “would halt the unfettered competition between corporate tax systems within the single market by targeting profits where they are made.’”

The measures call for amendments to the EU Common Corporate Tax Base to allow companies to file the same tax return in every member nation in which they do business. It also would provide tax deductions for research and development, and would eliminate a bias against equity financing compared to debt financing.

The pending EU corporate tax reform plan also calls for a second phase that includes a consolidation or “apportionment formula” that would involve revenue transfers from one country to another depending on where profits are earned.

The European Parliament can only recommend on tax legislation. It is up to EU member nations in the Council of Economic and Financial Affairs to decide whether they will accept the recommendations. As is the case with all EU tax legislation, the European Parliament doesn’t have co-decision powers.

Countering U.S. Reform

Supporters hailed the plan as a corporate tax scheme for the 21st century, and also insist it’s the best path for the European Union to counter the newly adopted U.S. corporate tax reform.

“By adopting this plan we will give multinational companies a more efficient way to do business in the EU single market,” Paul Tang, a Dutch parliamentarian and co-sponsor of the legislation, said at a March 14 news conference. “It would also help prevent a corporate tax race to the bottom that we face because of the U.S. tax reform,” which cut its corporate tax rate to 21 percent from 35 percent in the 2017 tax act ( Pub. L. No. 115-97).

Despite the large majority supporting European Parliament amendments, the vote—as well as the debate that preceded it—underscored the political difficulties EU corporate tax reform faces. Many of the 145 “no” votes came from parliamentarians representing low-tax EU member nations, including Ireland, Malta, Cyprus, Bulgaria and Hungary. EU tax legislation requires unanimity by all 28 EU members.

“This legislation will have a minimal impact on the fight against corporate tax evasion,” said Brian Hayes, an Irish member of the European Parliament and a co-sponsor of a minority opinion to the corporate tax reform amendments expressing opposition. “This measure as it stands would cause significant negative economic impacts for small countries such as Ireland.”

Hayes and other opponents insist the only way to design effective and fair digital taxation legislation is through the Organization for Economic Cooperation and Development, as well as the G-20.

“If the EU adopts this tax legislation or the upcoming European Commission digital taxation proposal, it will only drive companies out of the EU and therefore will result in a loss of jobs and revenue,” said Gunnar Hokmark, a Swedish parliamentarian. “That is why there is a need for a global solution to the digital taxation issue.”

Big Country Backing

The CCTB reforms and the European Commission digital proposal both have the overwhelming support of large EU member nations, especially France, Germany, Italy and Spain. All four contributed to a March 1 letter to Group of 20 finance ministers, who will meet March 17 and 18 in Buenos Aires. While they emphasized that a long-term global digital tax is needed, they also made clear that an “interim solution”—such as what the commission will propose March 21—is needed.

“The specificities of the digital economy require new global rules governing territorial nexus and allocation of profits,” said the EU letter, which was also signed by the European Commission. “This should not stop countries—as a first step—from adopting interim solutions, preferably on a coordinated basis to deal with the issues raised in the shorter term.”

The commission’s upcoming digital tax proposal will call for a temporary turnover tax on digital companies with global revenues of 750 million euros ($930 million) or more. One part of the plan will require companies such as Alphabet Inc.'s Google or Facebook Inc. to pay the tax on advertising revenue earned based on an EU country-by-country basis. The other part of the interim plan will call for companies using online platforms such as Amazon.com Inc., Ebay Inc., Airbnb Inc. and Uber Technologies Inc. to pay taxes on each of their transactions processed in each EU member state.

The commission proposal is aimed at large internet companies, but smaller EU online merchants that use companies such as Amazon are lobbying against it because they fear it will drive up their costs and give a competitive edge to non-EU based companies selling into the EU market. They also insist it will cement the large market shares for Amazon and eBay Inc.

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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