Tech Groups Raise Concerns About EU Digital Tax

The European Commission’s proposal for a digital services tax would be “deeply harmful” to the EU business environment and may lead to double taxation, a coalition of business and technology groups has warned EU leaders.

An open letter published by the Information Technology Industry Council (ITI) ahead of the European Council’s next meeting, which is due to take place June 28-29, declares that unilateral measures to tackle the tax challenges posed by the digital economy should be resisted, both by member states and the EU, and that work should continue on this at issue at international level.

“We share the Commission’s view that unilateral tax actions by individual member states would be undesirable – and believe the Commission should refrain from pursuing precisely the same unilateral actions,” the coalition wrote.

“We urge member states to refrain from adopting unilateral national tax approaches, to redouble their commitment to vigorously pursue the discussion for a global solution within the OECD’s inclusive framework, and to recommend that the Commission do the same,” the letter added.

In March 2018, the Commission proposed two measures: an interim tax on the turnover of companies engaged in digital activities that would otherwise go untaxed, at a rate of three percent; and a longer-term solution, which the EU will seek to achieve international consensus on under the leadership of the OECD, which would establish new digital permanent establishment rules.

The interim measure would be levied on revenues created from selling online advertising space; created from digital intermediary activities; and those created from the sale of data generated from user-provided information. Such would apply only to companies with total annual worldwide revenues of at least EUR750m (USD875m) and EU revenues of EUR50m.

However, while recognizing the need to address the challenges to international tax policy created by digitalization of the global economy, the group said that the Commission’s proposals “raise a number of questions and concerns,” particularly with respect to taxing revenues rather than profits and departing radically from existing permanent establishment concepts.

“Imposing a tax on revenues, taxing digital advertising, or moving the place of taxation from the company’s permanent establishment to users’ location – would be deeply harmful to Europe’s business climate and arguably lead to double taxation,” the letter states. “These proposals represent a troubling departure from ongoing multilateral OECD discussions, undermining certainty and predictability for trade and investment.”

“Taxing digital revenues rather than profits would not only overturn longstanding international principles on corporate taxation. It could also disproportionately harm the companies that Europe is most interested in supporting, namely start-ups and scale-ups that have expenses exceeding revenues,” the letter continues. “The idea that revenue thresholds are the right approach to ensure that smaller start-ups and scale-up businesses remain unburdened is incorrect, given the effects this tax could have on the ecosystem as whole, for example potentially creating higher selling and marketing costs for European players and particularly SMEs and start-ups. These measures would create an uncertain business climate and affect potential future investment, job creation and overall competitiveness.”

As the digital services tax would be based on the location of consumption rather than production, the coalition also warned that companies could face “widespread double taxation.”

Furthermore, the coalition argues that the issues at hand are not unique to the types of companies targeted by the EU digital services tax, but also apply across the board as firms in other sectors digitalize their operations.

“As noted in the 2015 BEPS Action 1 Report, the digital economy is increasingly becoming the entire economy and cannot be ringfenced for tax purposes. As such, the digital tax debate is less about tech companies and more about companies in every sector adopting digitalization,” the letter noted.

“Europe’s tax policies should not discriminate against any company based on their business models or otherwise focus on certain kinds of companies, since virtually all companies now do business digitally,” it added.

The letter emphasized that a “fair and proportionate reform of the corporate tax system” can only be achieved multilaterally through the forum of the OECD.

In addition to the ITI, the letter was signed by Irish business association Ibec, the Computer and Communications Industry Association, Technology Ireland, and techUK.