Digital company tax - a revolution in European tax systems
The European Union (EU) is on the verge of adopting the so-called digital company tax, which promises to adapt national tax systems to the digital economy and put an end to the effective tax evasion of international internet giants such as Google, Facebook, and Amazon.
While there is widespread support among European companies for a digital company tax, its introduction has been thrown into the whirlwind of almost all current affairs, both at European interconnections, Brexit, and concerns about Donald Trump's unpredictable trade policy.
The so-called digital company tax has reached the finish line in the EU, which will eventually allow corporate technology giants to profit from the profits of European citizens to be taxed on corporate income.
Digital company tax marks a revolutionary turning point in current tax principles - the company will no longer have to be physically present in the country.
The new tax is most strongly opposed by Ireland, which has so far attracted a significant number of global technology companies' European offices at low tax rates.
At present, the digital company tax enjoys the support of most EU Member States, as evidenced by the fact that a number of countries are preparing to introduce it on their own initiative.
Along with the EU process, the Organization for Economic Co-operation and Development (OECD) is developing guidelines for the introduction of such a tax, warning of the difficulties that could arise if versions of the rules of both organizations coexist.
Concerns have been voiced about US President Donald Trump's response to the tax, which is aimed primarily at US digital giants.
Inappropriate tax system for the 21st century
"All businesses in the European single market, whether traditional or digital, international, medium or small, are taxed. Our tax systems need to be introduced into the 21st century. Many countries' tax laws were written decades ago, when the digital economy did not play such a big role," said Gabriel Mato, a spokesman for the EPP party in a statement to the European Parliament, awaiting the European Parliament's vote on the so-called digital company tax.
A directive to introduce such a tax throughout the European Union (EU), proposed in March 2018, was put to a plenary vote in the European Parliament on 13 December following various levels of debate and improvement. The bill was approved with overwhelming support. The directive must be approved by the Council of Europe, with the unanimous support of all 27 Member States.
Until now, tax systems have been based on the principle that profits should be taxed at source. The country of registration or the physical location of the business determined the country entitled to claim tax payments from the business. The principles of the 20th century are no longer effective in the digital economy of the 21st century, where a company can provide a service or sell a product anywhere in the world via the Internet.
Companies operating in the digital environment use state infrastructure and the purchasing power of the population without paying taxes to the state, which has largely provided these resources. Instead, these companies are often based in other countries with favorable tax regimes or implement cross-border tax avoidance schemes. In this way, most countries miss out on millions of revenue in their budgets. The physical presence of local businesses pays a greater proportion of their income, creating unfair competition.
The Directive provides that companies that are not registered for tax purposes in the EU Member State but also receive significant income from services provided in the digital environment, such as advertising, website maintenance, software sales, search tools, will also be liable to corporation tax.
If a company earns at least EUR 7 million a year in digital services in a Member State of the European Union, or receives more than one hundred thousand users, or at least three thousand commercial contracts for the provision of digital services to users in one Member State, digital presence. " Companies with a significant digital presence could be charged 3% corporate income tax, or so-called digital company tax.
Everyone has to pay taxes
While the digital economy is estimated at only about 4-5% of the total, it is growing rapidly and shows no signs of slowing down in the foreseeable future. The tax is estimated to bring in € 5 billion a year in revenue to the EU.
It is no secret that the digital company tax targets large and US-based digital giants such as Google, Apple, Facebook, Amazon and others that have received special attention so far. These companies make huge profits from European citizens by collecting personal data, selling advertising and other services in the digital environment. However, taxes are often paid only at the place where they have their headquarters in Europe.
The countries with the lowest tax rates, such as Ireland or Luxembourg, are most often chosen as its location. Often, sweetheart tax deals are also concluded with these countries, which provide for special, significantly lower tax rates than others. Through "holes" in national legislation and appropriate cross-border tax planning, international digital giants are able to minimize their tax payments.
Rough and early?
While the changes are largely welcomed, there are also legitimate concerns about the proposed Directive. First, the planned tax will place the heaviest burden on high-turnover but low-profit companies, says Gillan Tansa, a board member of travel.com and one of the largest e-commerce companies in the world. As a result, European start-ups and digital ecosystems will be most burdened. In other words, Europe, in a hurry to respond to the rapid development of the digital market, will "kick in" itself.
Secondly, the sudden introduction of different variants of this tax regime in the different EU Member States and in the EU as a whole will create a complex and fragmented system. The newly introduced changes in Member States' tax systems should, in the short term, be brought into line with the requirements of the EU Directive. It is known that similar types of tax solutions are being worked on within the Organization for Economic Cooperation and Development (OECD). Critics point out that the most sensible scenario would be to wait for the recommendations made by the respected organization to be developed by 2020, and only then to develop the appropriate regulation. The Danish, Irish, Maltese and Dutch Parliaments have also made such an argument.
The OECD itself also makes the same arguments in its report. The OECD warns that developing a solution at European level before a global solution is found could pose considerable challenges. This could lead to a higher than the expected tax burden on players in the digital economy, resulting in "market distortions, double taxation, uncertainties, and complications, which would mean higher costs to comply with the law".
Ahead of EU plans
Alongside the initiative at the EU level, several Member States have already introduced such a tax at the national level. The first in line is Italy, which has introduced a digital company tax with this year's budget law and will apply it from 2019. March 1. Similarly, as planned in a European Union directive, Italy will be taxed at a rate of 3% on income from various types of services in the digital environment. The tax will have to be paid by companies that generate at least € 5.5 million a year in digital services in Italy, or at least € 750 million a year in revenue of any kind.
On the heels of Italy's introduction of this tax, France mentions it. If the most optimistic forecasts come true, the tax could be applied as early as 2020. January 1, making payment for income earned during the first month of the year. In France, the tax is called the GAFA tax, with the initials of the most popular internet giants Google, Apple, Facebook and Amazon. These companies have so far been wary of commenting on the GAFA tax.
A similar situation exists in Spain. The Spanish central government approved a draft bill that imposes a 3% tax on the profits of digital companies, identical to what was planned at the European level. Following the example of France and Spain, Austria is also promising to introduce its GAFA tax in the near future. "In addition to action at European level, we will also take steps at the national level," said Austrian Chancellor Sebastian Kurz.
One gain, another loss
In addition to the technical considerations above, strong political and business interests are at the heart of the objections to the digital company tax. The greatest resistance so far has come from Ireland. Ireland is known to have been chosen by GAFA and other global companies as their tax jurisdiction through the Irish favorable tax treatment and low tax rates. Ireland has, so far, been generating significant tax revenue from these companies.
Unlike other European countries, which the new tax would bring in additional revenue, the Irish Revenue Commissioner expects the country to lose around € 160 million. The introduction of the digital company tax would significantly reduce the amount of foreign direct investment. By comparison, Spain plans to generate nearly € 1.2 billion in additional revenue from the digital company tax, while the French Minister for the Economy hopes to increase the budget by as much as € 500 billion this year.
Benefits of Brexit?
Ironically, a digital company tax could also allow the UK to gain some gains from leaving the EU. Ireland has told its European partners that after Britain's withdrawal from the EU, European-based digital companies could move to the UK, where they would not have to introduce such a tax.
Initially, Ireland's position had relatively widespread support among European countries, but now only Sweden, Denmark and Estonia have remained as allies, an anonymous source reported. Much pressure to support the initiative comes from countries, particularly France, which, as mentioned above, are planning to introduce a digital company tax themselves. The Austrian Presidency of the Council of Europe in the second semester of 2018 also provided greater opportunities to drive the initiative, which allowed it to be put on the European agenda.
Most likely, the announcement by UK Finance Minister Philip Hammond of the introduction of such a tax in the UK from April 2020 has played a major role. As Ireland's strongest argument against digital company tax is no longer relevant, it is expected that the Directive will be approved more easily by the Council of Europe.
However, looking beyond the borders of the EU, there are far greater risks than competition between the EU Member States. The so-called GAFA companies, which are the principal and sometimes appear to be the sole tax target, are based in the US. "The greatest risk is for the United States, which might decide to take retaliatory action against countries like France, acting individually [not within the EU]," said Anton Colon, a tax lawyer from the international law firm Norton Rose Fulbright, in an interview with France 24
Concerns are further compounded by the aggressive trade policy of the current US President Donald Trump. The president has previously spoken out in his Twitter account about the possible introduction of tariffs on European goods. This is in response to a $ 5 billion censorship distortion penalty imposed by the European Commission this summer, making its search tool and other applications virtually the only one available on Android smartphones. "The European Union is probably as bad as China, only smaller. What they do to us is terrible, "Trump said in an interview with Fox News last July. Such statements have made Germany particularly vigilant. Large German car companies could be the first to be hit by US tariffs.
While the revolutionary vision of the European Union continues to be rocked by a variety of business and political interests, few are questioning the need for a digital tax in general. The tax system has always changed with the times. The emergence of the digital economy will be no exception.