Internet User-Location Issues Putting EU Digital Tax Plan in Peril

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By Joe Kirwin

The European Union’s plans for a 3 percent digital transaction tax—on companies such as Alphabet Inc.'s Google, Amazon Inc. and Facebook Inc.—is under fire for lacking legal backing because of problems identifying the location of consumers targeted by advertising.

Critics, among them officials from countries within the bloc and senior tax advisers, also raised serious tax fairness issues related to taxing intermediate online platforms that connect users and sellers. Those issues could be a major obstacle following several rounds of EU member-nation negotiations held earlier in May.

The March 21, digital tax targeting large internet companies is designed to be a temporary measure aimed at digital companies with an annual turnover of 750 million euros ($877 million) or more that sell user data for focused advertising, or that have online platforms for buying and selling goods and services.

The levy is supposed to be temporary until EU member nations, as well as the OECD, agree on a long-term solution that would establish a virtual permanent establishment.

Flawed Definition

Both the user ID and intermediate problems associated with the EU digital transaction tax were a key theme at a May 23 conference hosted by the Brussels-based European Tax Adviser Federation.

“The problem of user ID is due to the fact that the proposal lacks a proper, legally tight definition,” Pawel Gruza, Poland’s undersecretary of state, said at the ETAF conference. “This is crucial when it comes to collecting and distributing the revenue collected from the digital transaction tax.”

Other EU member-nation tax experts, who participated in the first two rounds of Council of Minister negotiations on the digital transaction tax held earlier in May, confirmed to Bloomberg Tax that the user ID problem was a key technical issue raised by a number of EU members.

Maria-Elena Scoppio, a European Commission tax official within the indirect tax division — who led the work in designing the pending EU temporary digital transaction tax — said May 23 that identifying the server location of the internet user was the only workable solution when it comes to a user-ID definition.

“The user ID as outlined in the proposal is as a proxy,” Scoppio told Bloomberg Tax after participating as a speaker at the ETAF conference. “It was the only option possible. Every other possibility would not work.”

“It is not bulletproof but it is the best option,” Scoppio added.

In addition, the recent Organization for Economic Cooperation and Development interim report on digital taxation didn’t have an answer to the problem of user ID location.

Asked about the ID-location problems raised by virtual private networks or fake IDs or bots—essentially software robots—she said: “there will always be fraud.”

Lower Intermediary Tax Rate

Gruza, who sparred with Scoppio on key issues related to the digital transactions tax when the two sat next to each other on the podium at the ETAF conference, also took issue with the plan to tax online platforms that connect buyers and sellers.

“It is unfair to charge the same rate for intermediaries as for targeted online advertising sold by large internet companies,” Gruza said. “This tax will only be passed on to many of the small companies using online platforms to buy and sell goods and as a result they will have to raise their prices. This will be put them at a competitive disadvantage compared to traditional sellers.”

Gruza added: “As a government tax authority I do not wake up in the morning worrying about lost revenue from intermediate online platform sellers. Our biggest problem is VAT fraud.”

Speaking to Bloomberg Tax following his remarks May 23, Gruza said the pending EU digital transaction levy as currently defined has little chance of being approved by all 28 EU member nations. “There are too many technical and political issues.”

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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