Revenue Estimates for Digital Services Taxes

April 26, 2019

Following the failure of the EU to agree to a new tax on digital services at the end of 2018, several European countries have moved forward with plans to adopt their own unilateral measures. Though some of these efforts predate last year’s proposal from the European Commission, Austria, Belgium, France, Italy, Spain, and the United Kingdom are each pursuing their own digital taxes. Other EU countries like the Czech Republic and Poland are exploring similar taxes, but the proposals are not yet fully developed.

In general, these proposals are designed to tax (mostly) foreign digital companies. Many politicians have made an argument about how much digital firms pay relative to more traditional business models. However, the claim that digital companies pay tax at less than half the rate of traditional businesses is not supported by the cited research. In fact, by some measures, digital companies pay similar rates of tax as traditional businesses.

But how much do governments expect to raise in new revenue from these taxes? The 2018 European Commission proposal estimated that €5 billion ($5.6 billion US) could be raised from an EU-wide 3 percent tax on revenues from digital companies that had both more than €750 million ($835 million US) in worldwide revenue and revenues in the EU of €50 million ($56 million US). The scope of the proposal was focused on digital advertising sales, online marketplaces, and sales of user data.

A new €5 billion ($5.6 billion US) source of revenue would amount to just 0.08 percent of revenues raised in 2017 by EU member state governments and institutions of the EU.

Revenue estimates for new taxes are often quite difficult to get right. Without the necessary information on the size of the new tax base, estimators are even more in the dark than they might otherwise be about the potential revenue impact of a proposal. However, it is worth reviewing some of the estimates to get a sense of the potential magnitude of the revenue that these new taxes might raise.

Of the six European countries mentioned above, just five have released revenue estimates of their proposals. Though each country has a somewhat tailored approach to these taxes, it is helpful to see how the revenue estimates compare for the coming years.

Austria

The Austrian government has proposed a digital advertising tax that would tax the revenues of online advertisements at a rate of 5 percent. The tax would apply to companies with both more than €750 million ($835 million US) in worldwide revenue and revenues in Austria of €25 million ($28 million US).

The new tax is paired with other proposals impacting digital companies, but the amount raised from just the digital advertising tax is estimated to be €25 million ($28 million US) in 2020. In 2023, the tax is expected to raise €34 million ($38 million US).

The digital advertising tax revenue estimated for 2020 is 0.02 percent of total Austrian revenues and 0.3 percent of corporate tax revenues for 2016, according to OECD data.

Table 1. Austria: Digital Advertising Tax Revenue, 2020-2023

Source: https://www.bmf.gv.at/steuern/WFA_DiStG_Beg.pdf?6x1a08

  2020 2021 2022 2023
Millions of Euros 25 28 31 34

France

The French proposal is similar to the 2018 European Commission proposal in that it targets revenues of digital firms from advertising, online marketplaces, and sales of user data. Companies will be within the scope of the tax if they have both more than €750 million ($835 million US) in worldwide revenue and revenues in France of €25 million ($28 million US). The proposed tax rate is 3 percent.

The French government estimates that the tax will raise €500 million ($555 million US) by 2020. This amounts to 0.05 percent of total French tax revenues and 0.9 percent of corporate tax revenues from 2017.

Italy

The Italian government is on the second round of its digital tax proposals since the first law was enacted but not implemented. The current proposal is for a 3 percent tax on revenues from digital services. A company is within the scope of the tax if it has both more than €750 million ($835 million US) in worldwide revenue and revenues in Italy of €5.5 million ($6.1 million US).

The government expects to raise €150 million ($165 million US) in 2019 from this tax, with the tax generating €600 million ($660 million US) in both 2020 and 2021. The 2020 revenue estimate, when compared to data on Italy’s tax revenue for 2017, is 0.08 percent of total revenue and 1.6 percent of corporate tax revenue.

Table 2. Italy: Digital Services Tax Revenue, 2019-2021

Source: Source: https://www.pwc.com/gx/en/tax/newsletters/tax-policy-bulletin/assets/pwc-italy-2019-budget-law-introduces-a-digital-service-tax.pdf

  2019 2020 2021
Millions of Euros 150 600 600

Spain

Though the Spanish government failed to enact the budget legislation that included the digital services tax, it is possible that the proposal will be revived later this year. Businesses with more than €750 million ($835 million US) in worldwide revenue and revenues in Spain of €3 million ($3.3 million US) would be subject to the tax. Revenues from digital services would be taxed at a 3 percent rate.

In its budget proposal, the Spanish government estimated that the digital tax would raise €1.2 billion ($1.32 billion US) in 2019. This estimate is dramatically larger than other countries’ estimates of similar proposals, and the European Commission said it had “doubts about the estimated revenue-raising capacity” of the proposal. However, the Spanish government asserts that the lower applicability threshold of €3 million ($3.3 million US) will allow its digital tax to raise more revenue.

United Kingdom

The UK is pursuing a digital services tax that would apply from April 2020. The tax is a bit more complex than the other proposals because it includes an exemption for the first ₤25 million ($32.5 million US) of taxable revenues. Loss-making companies would face a 0 percent tax rate.

Beyond those points, the tax would apply to revenues from social media platforms, search engines, and online marketplaces. Businesses with more than ₤500 million ($650 million US) in worldwide revenue and revenues in the UK of ₤25 million ($32.5 million US) would be subject to the tax. The tax rate on revenues would be 2 percent.

The tax is expected to raise ₤275 million ($358 million US) in fiscal year 2021 and ₤440 million ($572 million US) in fiscal year 2024. The fiscal year 2021 revenue estimate is 0.04 percent of total tax revenue in 2017 and 0.5 percent of corporate tax revenue.

Table 3. UK: Digital Services Tax Revenue, Fiscal years 2019-2024

Source: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752172/DST_web.pdf

Note: Unlike other countries with a fiscal year the same as the calendar year, the UK fiscal year ends on April 5 each year.

  2019-20 2020-21 2021-22 2022-23 2023-24
Millions of Pounds 5 275 370 400 440

Conclusion

The digital taxes being considered and working their way through governments in Europe vary in scope and impact. The revenue raised from these taxes is relatively small, but because these taxes are new and come with potentially significant compliance costs, the revenue estimates represent just a part of the cost these taxes will place on businesses.

Both the compliance costs and the tax burden will likely be shifted away from digital companies toward users of online platforms and small businesses that advertise online. Policymakers should closely review these proposals to determine if the tax revenue is worth the administrative burden that these taxes represent.

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