Trade

EU takes on digital giants with new revenue tax

The European Commission unveiled a new initiative Wednesday that aims to tax the revenues of tech companies like Google and Facebook, ramping up tension with the United States amid a broader standoff over trade.

The move comes after EU leaders criticized U.S. President Donald Trump over his plans to slap steel and aluminum tariffs against the bloc, warning they could lead to a trade war with the bloc. U.S. Treasury Secretary Steven Mnuchin has already blasted the idea of an EU digital tax as being “redundant.”

Under the current proposal — which needs to be approved by all EU member countries before becoming a reality — EU governments stand to collect some €5 billion a year in revenues from the proposed 3 percent tax, which is a major shift from the traditional policy on corporate tax that goes after company profits where they are booked. In a joint statement, a group of the EU’s five biggest economies, including France and Germany, said they welcomed the proposal for a digital tax.

With this rare tax move, Brussels is upping the ante in its longstanding battles with Silicon Valley and Washington. Paris was a major proponent of a move to make digital giants pay more into national coffers. But it’s far from clear whether the proposal will survive inevitable pushback from the United States as well as several EU countries, which remain uncomfortable with Brussels’ expanded role on tax and fear starting a “tax war” with America.

Any tax initiative — including temporary measures — needs to be unanimously approved by EU governments before it can go into force.

According to the Commission, the existing tax rules are now outdated with the emergence of the digital economy, which allows firms to operate across the globe without having a physical presence in many countries. But the new EU initiative may never become law due to opposition from a group of skeptical countries, including Ireland and the Nordic states.

“Our pre-internet rules do not allow our member states to tax digital companies operating in Europe when they have little or no physical presence here,” Pierre Moscovici, the Commission’s tax czar, said after unveiling the proposals. “This represents an ever-bigger black hole for member states, because the tax base is being eroded.”

A radical shift

The Commission’s “interim tax” would affect any company operating in the EU with annual global revenues of €750 million or more, as well as total taxable revenues of €50 million generated across the bloc. The threshold is set to capture some 150 companies, half of which are based in the United States, Moscovici said, while a third could be EU firms. The Frenchman did not name any companies.

EU countries, however, are wary of angering the Trump administration by introducing a short-term revenue tax, which the Americans deem a direct attack on their tech companies.

Moscovici said this isn’t the case, stressing that the proposal is designed to apply to digital firms from all over the world.

Commission officials explained that all online companies that make money by collecting data and using it to sell targeted ad space would be affected. That means the big fish: Facebook, Twitter, and Google, among others.

Platforms that act as intermediaries for online transactions — think AirBnB — would also get hit. However, content providers that rely on subscriptions, like Netflix, would get a pass.

Moscovici said the decision to target revenues was based on the fact that “this is the easiest way to catch” the money that tech firms like Facebook make from collecting and selling user data. Officials added that the Commission opted to pursue this technique, as “there is legally no other way to do it.”

The Commission on Wednesday also issued a longer-term initiative to upgrade the EU’s corporate tax rules.

No need for physical presence

The reform would ensure that company profits are “registered and taxed where businesses have significant interaction with users through digital channels,” the Commission said. This approach would mean that countries can still tax a company, even if it has no physical presence there.

That proposal came with a non-binding “recommendation” calling on EU governments to renegotiate double-taxation deals with countries outside the bloc, to make sure the new tax doesn’t clash with international tax deals.

Any tax initiative — including temporary measures — needs to be unanimously approved by EU governments before it can go into force. That condition could prove challenging for the short-term tax on revenues.

Google is one of the tech firms targeted by the European Commission’s digital tax proposal | Patricia de Melo Moreira/AFP via Getty Images

France, in particular, has long championed the revenue levy as a means to collect more tax from digital firms, and has called on the EU to agree on it by the year’s end.

But others — including Ireland, Luxembourg, and Cyprus — have voiced their preference for a global solution through the Organization for Economic Cooperation and Development. EU leaders are set to discuss the Commission’s tax initiatives on Thursday evening when they meet in Brussels for an informal dinner.

The industry reaction to the Commission proposals has been much more clear cut: Companies don’t like them at all.

“This proposal harms business certainty in Europe and would chill trade and investment from companies across the globe,” said Dean Garfield, the president and chief executive of Information Technology Industry Council, which represents the likes of Google and Facebook.

“We strongly urge the EU to reconsider its approach and are committed to working with it to address these important international tax questions in a deliberate, constructive, and multilateral way.”

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