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Member states go it alone as EU plans to tax the digital economy flounder

Member states go it alone as EU plans to tax the digi..

What is the current state of play on digital economy taxation in the EU?

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At last month’s meeting of Finance Ministers in Sofia it quickly became apparent that the EC’s proposed interim digital tax plans were in serious danger of being read their last rites. Ireland, the UK and Denmark all came out in opposition to the plans, while Finland, Luxembourg, Sweden and Malta also raised serious concerns. Somewhat surprisingly, Germany also appeared to be getting cold feet, highlighting a growing unease in Berlin as to the viability and international ramifications of the EU’s plans. The interim tax, which sought to tax multinational groups at 3 percent on gross revenue from user value creation, is seen by many as being highly politicised. Furthermore, concerns have been raised over whether this could provoke retaliation from the US. Given the current US administration’s ‘America First’ agenda, these concerns cannot easily be dismissed and member states are perhaps wise to be cautious. So, as the EU’s proposals flounder, where does this leave us?

Unfortunately, rather than taking a deep breath and reassessing the overall situation, last week’s meeting seems to have galvanised certain EU member states to go it alone and introduce unilateral measures. The Spanish Government quickly announced its intention to introduce a digital tax from FY19, which would be modelled closely on the EU’s proposals, to fund its domestic pension expenditure. Spain joins a growing list of jurisdictions (including Italy, Hungary and Austria) who have already introduced or announced their intention to introduce new digital tax legislation. It is also highly likely given the overtures from both the French and Portuguese Governments that should the EU proposals fail, they will not be far behind.

This trend is worrying for a number of reasons:

  • By implementing unilateral short term solutions Governments are damaging the chances of longer term global solutions. It is only through enhanced international cooperation that a comprehensive well thought through global solution will be developed;
  • Unilateral short term solutions are likely to take the form of turnover taxes, akin to the EU proposals, which will inevitably lead to double taxation;
  • Greater complexity and an increase in the compliance burden for Multinational companies (MNCs) who have already had to deal with an unprecedented level of change in the international landscape over the past two years. MNCs will have to comply with multiple sets of rules which may all look and feel broadly the same but will all have their own quirks and idiosyncrasies; and 
  • Turnover taxes have a disproportionate impact on low margin/high volume businesses and start-up companies in the early loss-making phases of their development. There is an argument that our Governments should be focusing on creating a vibrant international business environment, one in which entrepreneurs are rewarded for creating and developing innovative new digital business models and solutions, rather than penalising them.

Supporters of introducing specific taxes for tech companies argue that these businesses derive a high proportion of their value from customer data and content, while in many cases paying little in the way of corporate tax in the markets in which their customers actually reside. This is heightened by growing concern over privacy issues, and the level of economic and political power these businesses are perceived to wield.

However, it is vital that we do not lose sight of what is at stake here and fall into the trap of seeing the taxation of the digital economy as merely a tax avoidance issue. The OECD’s base erosion and profit shifting (BEPS) Action plan dealt with the issues of the past, but what Governments are now trying to tackle is the future of corporate taxation.

The digital economy is not a separate and distinct arena in which only a handful of large US head-quartered MNCs operate. Rather, it is, or will be, inextricably woven into the very fabric of most groups’ operating models and commercial strategies. Time spent now considering questions such as the purpose and scope of these rules is time well spent and will help to avoid mistakes and rash decisions that could come back to haunt Governments and businesses later.

Since the UK electorate’s decision to leave the EU in 2016, concerns have been raised by business leaders around the UK’s competitiveness. Recently Philip Hammond came out in opposition to the EU’s plans which may indicate that the Government has been listening and acknowledges the need to act collectively rather than going it alone.

For further information please contact:

John Addison
 

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