Tech giants like Google and Facebook may soon face a new tax in the EU that could deliver a major hit to their bottom line — as well as a radical shift in the way their tax bill is calculated.
According to a 12-page draft report obtained by POLITICO Pro, the European Commission wants to tax digital companies’ gross revenues at rates between 1 and 5 percent, based on where their users are located and how much advertising revenue they bring in.
If implemented, this move is bound to further ratchet up tensions between Europe and the United States.
From its aggressive enforcement of antitrust regulations, most prominently in recent years against Google, to its crackdown on Apple‘s use of Ireland as a tax haven, to its stringent approach on online privacy, Brussels is pushing to set the rules for the global digital economy — often to the dismay of Silicon Valley and Washington.
“The suspicion of many in the US is that this is really protectionism” — Dan Niedle, partner at law firm Clifford Chance
The Commission proposal, as first reported by Reuters and one of several options being floated, stems from a French-led effort to get more money from digital firms.
President Emmanuel Macron last year won the backing of Germany and more than a dozen other EU countries, but fell short of winning unanimous backing after pushback from the United States and low-tax EU countries including Ireland.
At a time when EU leaders are up in arms over U.S. President Donald Trump’s tax reform because it gives U.S. companies an incentive to repatriate overseas earnings, a European tax on digital companies’ revenue would offer a way of hitting back. Most of the firms concerned by the tax are Silicon Valley-based, and are sending billions of dollars in overseas-held cash back to the United States.
“The suspicion of many in the US is that this is really protectionism,” said Dan Niedle, a partner at law firm Clifford Chance. “Europe has largely failed to create successful large digital businesses. European traditional business are being out-competed, and this could be viewed as an attempt to stop that.”
He added: “Whether that is fair or not, U.S. retaliation is a real possibility.”
The digital tax is far from becoming a reality, as any push to legislate is likely to hit opposition in Council, where low-tax countries such as Ireland would push back.
Tech giants like Google will face a radical shift in the way their tax bill is calculated | Loic Venance/AFP via Getty Images
As experts point out, taxing revenue is not just a radical break with the global standard of levying profits; it’s a guarantee that EU states would fall afoul of bilateral deals against double taxation with other states around the world. Implementing it would require thorny talks to amend the deals.
Another obstacle to getting this proposal turned into law is the EU’s fundamental divide on taxes. To change tax rules at the European level, countries need to agree unanimously. No such agreement is in sight as long as low-tax countries like Ireland and Luxembourg see their livelihoods tied to revenue from foreign firms.
Ireland — which has resisted orders from the EU executive to collect €13 billion in taxes from Apple — resisted the French-led push on digital taxes previously and is likely to do so again.
‘Huge problem’
One leader who would cheer for an EU-wide tax is Macron.
His government lobbied for months to gain broader support for a digital tax on revenues, managing to enlist more than a dozen countries, including Germany, for the idea. Even Brexit Britain has now endorsed the politically popular idea of making tech giants cough up more tax.
Macron only fell short of getting the idea adopted due to a blocking minority of EU member states.
The Commission’s proposal — which the document described as a “temporary measure” and which should be formally unveiled in March — carries clear echoes of the French-led original proposal.
The digital tax is not imminent, as any push to legislate is likely to hit opposition in Council | Leon Neal/Getty Images
It would apply to digital firms that have global revenues exceeding €750 million and annual EU revenues of at least €10 million. All online companies that make money by collecting data and using it to sell targeted ad space would be concerned. That means the big fish: Instagram, Facebook, Twitter and Google, among others.
Platforms that act as intermediaries for online transactions — think home rental platform AirBnB — would also get hit.
However, content providers that rely on subscriptions, like Netflix, would get a pass.
In practice, Europe would make use of a “one-stop shop” system to collect its digital revenue tax.
This means that countries would pay their taxes to the local authority in the country concerned. The tax income would be disbursed to other EU countries according to a proportional system. Such an approach lets the EU avoid levying the tax itself, which is not possible under current rules.
“It will take 27 brave finance ministers to get this through” — Dan Niedle
Neidle argued that while some digital firms have huge profit margins and would hardly feel a hit from the revenue tax, others like AirBnB have wafer thin ones — and would have to pass on the cost to their users.
“Let’s see how much public support for digital taxes survives a ‘digital tax supplement on taxi rides,'” he wrote in an email. “It will take 27 brave finance ministers to get this through.”
Anticipating pushback on a revenue tax, the Commission is floating another proposal, this one “long term” — applying a “corporate tax on profits resulting from providing digital services” across the bloc.
That solution would come 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.
One national tax expert in the Council also expressed concerns that EU governments would fail to agree on the long-term solution, as renegotiating double-taxation treaties is politically sensitive and risks complicating deals that are already in place.
“There will be a huge problem to abolish the targeted solution, even though it’s a short-term solution,” the Council official said. “It won’t be easy to delete it.”
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