European Countries Push Forward on Digital Taxes Despite Pleas to Wait

February 9, 2018

On February 7th, France and Germany, the two largest economies in Europe, announced their intentions to target the Google, Apple, Facebook, and Amazon, referred to as GAFA, with new taxes. These countries have argued that GAFA are paying far less taxes than corporations in other industries. The European Commission (EC) has implicitly endorsed the unilateral implementation of taxes on tech companies, even at the protest of the Organisation of Economic Co-operation and Development (OECD).

France’s financial minister, Bruno Le Maire, promised new taxes on digital transactions by 2019. “It’s not possible, not sustainable, that we tax manufacturing industries while billions in profits earned by GAFAs on European soil evaporate,” Le Maire said in an interview with Reuters.

Le Maire’s announcement is not new. President Emmanuel Macron’s government has already argued that large tech companies should pay more taxes in France. They have proposed taxing the large tech companies based on revenue rather than income.

Germany has similar concerns over tech companies paying too little in taxes but had an alternative to digital taxes. They would like a consolidated tax base in the EU with a minimum tax rate on business income. They suggested that more integration of EU corporate tax systems would lead to less income shifting and base erosion. A coalition between Chancellor Angela Merkel and the Social Democrats in Germany added that they wanted, “to give a European answer to international changes and challenges in this area, not least in the United States.”

The EC has echoed the concerns of Germany and France in a letter sent to the EU parliament. They argue that the current OECD rules are inadequate to address modern digital markets and need to be updated to reflect changes in technology. They suggest that, in the interim, EU countries should be allowed to implement taxes on revenue, levies on online ads, or withholding taxes on tech companies. The European Commissioner for Taxation and Customs, Pierre Moscovici, has announced that the EC will release guidance on digital taxation in March.

According to the EC, digital-based businesses, such as GAFA, are paying an 8.9 to 10.1 percent effective tax rate on income derived from sales in the EU. This is far below the 23.2 percent effective tax rate paid by traditional business models. The difference has led some ministries of finance to seek new taxes to close the gap between the two forms of business.

Not all countries in the EU are comfortable with France and Germany’s approach. The EC’s move to release guidance has shocked the OECD, who have scheduled an April release of rules around digital taxation in Action 1 of the BEPS initiative. Angel Gurria, the secretary general of the OECD, pleaded with the EC in an interview EUROACTIV:

Even in the EU there are different approaches to this. Let’s all do it together, let’s move together. Let’s progress in the OECD context as the G20 decided to do. Let’s respect that calendar. Don’t jump the gun and don’t do anything short-term that would block us from applying long-term solutions.

The Irish government has expressed similar concerns over the push toward digital taxation. Ireland’s finance minister, Paschal Donohoe, has publicly asked the EC to slow down and coordinate with the OECD. Ireland has built a coalition with Hungary and smaller member states asking the big four EU countries – France, Germany, Italy, and Spain – to wait for international consensus before unilaterally implementing digital taxes. However, Ireland’s pleas to wait for international consensus may ultimately fall on deaf ears.

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