Digital taxation out of sight – no agreement between member states

Although European citizens call for a taxation on giant tech companies, the Council has now abandoned negotiations on a common directive. In fact, the initial proposal has been watered down to a maximum. The European elections may not bring a major change, but some hope still remains.

What an eye-catcher it would have been, just like GDPR or the Roaming Regulation. According to a study conducted in December 2018, more than 80% of citizens in six large member states (MS) supported the introduction of a fair tax on giant tech companies. Most of them believe that multinational firms such as Amazon, Google or Apple avoid taxes and that authorities don’t force them to pay up.

Lately, the European Commission fined Google with a record amount of €4.34 billion, and the French government pushed Apple to pay back €500 million of tax money. Yet, these sporadic punishments do not change the bigger picture. First of all, our taxations system is outdated: each company pays its taxes in its country of residence. Whoever thought that IKEA would be Swedish and that Adidas would be German should not forget about their headquarters in the Netherlands. Secondly, by making profit from the use and sale of user data, digital companies have a fiscal and competitive advantage. “Whereas ordinary companies on average pay 23% of taxes in the EU, digital ones only pay 9%. We have to establish equal preconditions for both”, states EU Commissioner Vestager.

What is more, tech companies operate on a global level and while they use and sell data of European “customers”, they may not at all be taxed inside the EU. In principle, MS agree that a global regulation and taxation approach is necessary, especially since digital information is becoming more and more important. But they are quarreling on how this regulation should be set up to a point that they have now finally broken off negotiations. The digital service tax is currently blocked by the Council.

The facts so far

In March 2018, the European Commission issued a proposal on “Fair Taxation of the Digital Economy”. At that time, several countries such as Austria, France and the United Kingdom already had concrete plans to introduce such a tax on their own. French finance minister Bruno Le Maire publicly defended a European approach and warned against unilateral legislations, claiming that “the poison of fiscal fragmentation will kill us all”.

Anyway, it soon became evident that the European Commission overshot the MS’ expectations. According to the directive, companies with total annual worldwide revenues of €750 million and EU revenues of €50 million would pay a 3% tax of the earnings made from data sale, online advertising and user interactions. The COM estimates that this tax would generate around €5 billion income. But it triggered protest from several MS, such as Luxembourg, who feared a taxation of financial services, or Ireland, the home of Google’s, Facebook’s and Microsoft’s European headquarters.

The arguments

Indeed, the initial proposal raised some concerns. For instance, the tax revenue would be distributed according to the users per country, thus larger MS draw a bigger advantage of such a regulation.

Moreover, since the tax mostly targets big US companies, some MS fear retaliation from the US government, which could heavily affect countries with export surpluses like Germany. It’s true that US authorities frown upon latest European initiatives. When asked about Ms. Vestager, Donald Trump stated: “Your tax lady really hates the US.” This is why a general approach by the OECD is favored and a so-called sunset clause has been included. Hence, the directive would go out of force in 2025 if an agreement is reached at the OECD level.

Also, the kind of data sale had to be further defined along the negotiations. For instance, German car producers collect a lot of user data and sell them to other companies. Should they be taxed as digital companies?

In November, the Council already took up negotiations in the plenary and the Franco-German couple declared the ambition to set the seal on them at latest by March 2019. On March 12, the Economic and Financial Affairs Council rejected the bill again, although the directive had already been watered down so much that data sale – the whole purpose of the project – was not even included anymore. The taxation would have only concerned ad sales and would have no longer triggered €5 billion income. Again, a progressive common denominator between the 28 MS was out of range.

May the European Parliament (EP) elections deal a new hand?

Technically, no. Tax matters are decided by unanimity in the Council and without the support of Ireland, Denmark, Luxembourg and Sweden the proposal will remain blocked. The EP does not have a say and majorities after elections will not affect further decisions.

But on the other hand, the EP is the only democratically legitimate institution and it is supposed to represent public opinion. This feature empowers the EP to put pressure on the Commission and the Council. For instance, in June, the EP set up a committee on financial crimes and tax fraud. Such reactions are important, not only to gather technical information but also to show that the EU is working on such issues. In its opinion last December, the EP issued a list of taxable services and lowered the threshold of minimum taxable revenues from 50€ million down to €40 million. What strikes the most, is that an overwhelming majority of 451 parliamentarians adopted this opinion, going way beyond the watered-down directive of the Council.

Although there seems to be a big majority in favor, the distribution of seats in the next EP may change these circumstances. By the majority, negative votes in the EP were issued by the extreme right, namely the EFDD and the ENF, which is going to almost double its number of seats. The entire Socialists & Democrats faction adopted the opinion, but their influence will definitely shrink after the elections. It is too soon to make assumptions about the outcome of the elections, nevertheless, it is also gullible to think that the future parliament composition will increase the majority in favor of a tax on giant tech companies.

In any case, it is necessary to push for a common solution. Austrian finance minister Hartwig Löger warned: “11 MS have already introduced taxes on digital services, others will follow soon if we are unable to agree.” Besides the European elections, there will also be national elections, for instance, in Belgium and Denmark, where governments were neither very supportive of the bill. And since countries like Spain and the UK have announced to introduce a digital service tax, it is sure that the discussion will pop up soon again in the Council. Hopefully next time MS will close ranks before further fragmentation damages the Single Market.