European Union’s latest discord: digital tax

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| The European | 5th November 2018
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The reason for both political and economic success of the European Union bloc lies in unity among its member countries. The creation and success of a single currency, Euro and the successful handling of the Greek economic crisis are just two examples which show EU bloc’s unified strength. Over the period, the EU bloc has shared many successes and has dealt with many problems. However, just like any family, the EU bloc countries sometimes do not share same opinion on regional issues.

 

In March 2018, it was proposed that the EU bloc will impose ‘Digital Tax’ on big technology companies. This proposal has become the latest discord among the EU member countries.

 

This decade saw brick-and-mortar retailers closing their shops. Amazon and other “e-tailers” have changed the retail shopping experience. In fact, the retail market has made a radical shift towards the“digital sales business model”. Digital marketing and advertising have overtaken traditional methods of marketing and advertising of goods and services.

Digital Tax

Relevant extracts of news published in mainstream media are given below:

 

BBC (31 October 2018) reports:

 

“The European Commission in March introduced a proposal for a 3 percent tax on revenues of internet companies with global revenues above €750m (£660m) a year”.

 

“The UK plan announced as part of the Budget would place a 2% tax on sales by large social media platforms, internet marketplaces and search engines from April 2020”.

 

Reuters (31 October 2018) reports:

 

“Under a proposal from the European Commission in March, EU states would charge a 3 percent levy on the digital turnover of large firms such as Google and Facebook that are accused of routing their profits to the bloc’s low-tax states”.

 

Digital Tax-Benefits

 

Big tech companies have multiple (digital) revenue streams; advertising, marketing, the commission from eCommerce stores built on their cloud systems, sales of goods and services, etc. They earn billions in revenues. Even at a nominal percentage (2 or 3 percent) the tax recoveries will be massive and will boost state income.

 

Differences of opinion

 

There are three reasons due to which the EU bloc could not reach an agreement (till yet) on the matter of Digital Tax.

 

Scale of economy

 

The countries in the bloc which have large-scale economies can take the risk of losing the businesses of big tech companies, if those companies leave their country after imposition of Digital Tax. However, the countries which have small-scale economies are reluctant to add any new tax. They fear that if the tech companies leave their countries, they will lose their entire tax revenues.

 

The business competitiveness of the EU bloc

 

The Nordic EU countries are of the opinion that 3 percent Digital Tax on revenues of big tech companies will hurt the EU economy as the bloc will no longer be considered as “business friendly”.

 

The American factor

 

Though the American administration is engaged on multiple fronts, most notably the China Trade War, it is not happy with the UK (which has already proposed 2 percent Digital Tax; the proposal is subject to further review) and the EU bloc, which is holding talks among member countries to impose Digital Tax.

 

Germany, the economic powerhouse of the EU bloc, was the first to voice the concern that the US administration might retaliate by imposing tariffs of its own.

 

Country-wise sentiments

 

“A third of EU states” including Austria, France, Italy and Spain want to impose Digital Tax.

 

Ireland, Luxembourg, Sweden and Malta are reluctant to impose Digital Tax.

 

Two items are worthwhile to mention here:

 

Dublin City, Ireland is the “tech hub” of Europe. It is known as “Silicon Docks”, the name was given because every big tech company having an office in Silicon Valley, USA has an office in Dublin, Ireland. The tech sector in Ireland is one of the biggest job providers.

 

Malta, an archipelago (a group of islands) in the Mediterranean, is now the emerging Fintech hub of the EU bloc. Lately, it has attracted many companies from the crypto-world, especially Binance which is one of the largest crypto-exchanges of the world.

 

The reaction of American administration

 

Commenting on the issue of Digital Tax, Steven Mnuchin (US Treasury Secretary) said:

 

“A tax should be based on income, not sales, and should not single out a specific industry for taxation under a different standard”.

 

Kevin Brady, US Republican Representative from Texas said:

 

“If the United Kingdom or other countries proceed (to impose Digital Tax), that will prompt a review of our US tax and regulatory approach to determine what actions are appropriate to ensure a level playing field in global markets”.

 

Options available with the EU member countries

 

Austria, which holds the EU presidency, has proposed that rather adopting a “total revenue” approach to the Digital Tax, only revenues from online advertising services (in case of companies like Google & Facebook) and revenues from virtual marketplaces (in case of companies like Amazon) should be subject to Digital Tax.

 

The Austrian proposal is a balanced approach for computing Digital Tax. The EU finance ministers will meet in Brussels on November 6 to discuss the future course of action.

 

Outcome of the Brussels meeting

 

Britain has proposed a 2 percent Digital Tax. The UK Treasury forecasts Digital Tax will generate around UK Pound 400 Million in 2021-2022.

 

There is a high probability that the EU bloc will also reach an agreement at the Brussels meeting. However, there might be a minor change in tax percentage; from 3 to 2 percent to maintain the competitiveness of the business environment of the EU bloc.

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