Merkel’s Call to Tax Data Reveals Hurdles to Policing Tech Giants

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By Jabeen Bhatti

German Chancellor Angela Merkel’s call to put a value on data in order to tax it like a tangible product is fraught with unknowns and could place a huge burden on business, analysts told Bloomberg Tax.

In fact, while the approach might be preferable to current plans being considered by the European Union to tax multinational online giants like Facebook Inc. and Alphabet Inc.'s Google, they added, it would be near impossible to do the same in the short term.

“In general, I think Angela Merkel’s ideas are good, but I don’t think it’s very feasible,” Pola Schneemelcher, a research fellow with the Jacques Delors Institute in Berlin, a think tank that specializes the digital economy, told Bloomberg Tax May 30. “Raw data doesn’t create value.”

Merkel called on researchers May 28 to draft concrete proposals on how to determine the value of data and tax it like tactile products in order to more effectively close the taxation gap between traditional and digital business models.

“We have to incorporate that into our tax system,” she said at the Global Solutions Summit in Berlin, a conference of think tanks and policymakers that advises the Group of Twency and Group of Seven. Merkel added that a system in which citizens post their data for free on platforms, only to have it sold at a profit by tech giants, is unjust.

“The pricing of data, especially that of consumers, is in my opinion the central problem of fairness of the future,” she said.

Is it Feasible?

Even so, the chancellor’s good intentions are hardly feasible at the moment—and would likely cause a headache for authorities and tech giants alike if implemented too quickly, Schneemelcher said.

The crucial piece of the puzzle missing from the EU’s proposals, however, is the fact that “we don’t know how intangibles actually create value, and we don’t know where they create value,” Schneemelcher said.

“If you have a big amount of data, it doesn’t necessarily create value. What creates value in the end are pieces of software and algorithms,” she said, adding that tech giants’ digital business models are vastly different—simply producing a uniform measure of value for tax purposes would be virtually impossible to implement,” she said.

Google and Facebook declined to comment on the chancellor’s proposals.

Controversial Proposal

The chancellor’s call comes on the heels of the European Commission’s proposals in March outlining interim and long-term tax treatments for digital enterprises to address what European officials see as unfair practices by tech companies within the bloc.

According to the commission, digital businesses pay an effective tax rate of 9.5 percent as compared to 23.2 percent for traditional businesses.

That’s on account of their virtual offerings that don’t require a physical presence in a specific country of operations, meaning that profits ultimately aren’t taxed where value is created, according to the analysis.

As such, the European Union’s interim solution, known as the Digital Services Tax, would apply a three percent levy on services such as the sale of digital advertising or user data on companies with global revenues of more than 750 million euros ($874.4 million).

Meanwhile, the commission’s long-term Significant Digital Presence proposal, would seek to revise rules on what constitutes a digital company’s permanent establishment so as to properly tax profits in the country where value is created.

Jumping the Gun

But Schneemelcher, who has published multiple policy papers on the proposals, told Bloomberg Tax that the commission is “jumping the gun on the issue.”

For one, the proposals don’t take into account the fact that many traditional industries, like automotive manufacturing, have begun to digitize their processes and services, such as offers of automated driving.

That may put them in the crossfire of policies meant for the tech giants, industry representatives told Bloomberg Tax in April shortly after the commission first announced its plans.

Moreover, innumerable logistical problems would ensue with the proposals, Klaus von Brocke, the EU tax services leader for EY in Munich, said in a May 30 email.

“The biggest challenge for all [digital firms], but more so for service providers with uncountable traffic, will be to install software to track the localization of the users in order to file correct Digital Services Tax returns,” he said, placing a huge burden on industry and authorities alike.

Going Forward

As such, Merkel’s call to action for researchers to study the issue and draft comprehensive proposals on the matter with international partners outside the EU “in general is a good idea” that could help to develop a more comprehensive solution, she said.

Already, Ireland, as well as Malta and other regimes with friendlier tax policies for companies, have heavily criticized the EU’s digital taxation proposals, which can’t pass without consensus within the bloc.

“The proposals before us must be thoroughly reviewed and carefully considered,” a spokesperson from the German Chancellery said in a May 30 email. “This requires a vote at the international level. To this end, we are discussing possible solutions in the OECD and with the G20 partners. The statements of the Chancellor are in the context of these considerations.”

Such considerations are still in their nascent stages, and may be virtually impossible to implement for both business and governments. But Merkel’s move to corral international research and consensus on the matter is better than the alternative, Von Brocke said.

“This is a tactical move to show that a member state by member state approach is not a phantom discussion, but a real threat for all businesses,” he said. “A uniform EU or even an OECD solution is far more desirable.”

To contact the reporter on this story: Jabeen Bhatti in Berlin at correspondents@bloomberglaw.com

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

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