The EU is deeply divided over how to increase the tax take from tech giants such as Google, Apple and Amazon, who have recently come under fire for being perceived as not paying their fair share of taxes.
A controversial set of reforms spearheaded by French president Emmanuel Macron propose taxing tech companies on revenue instead of profits and taxing companies where they make money rather than where they are headquartered. To close tax loopholes, Macron also advocates harmonising Europe’s tax rates by 2020.
The sweeping proposals, which have reportedly garnered the support of at least 10 EU countries including Germany, Italy and Spain, took centre-stage at the EU digital summit in Tallinn, Estonia on 29 September.
The radical reforms are vehemently opposed by countries such as Ireland, Luxembourg and the Netherlands, where tech companies often base themselves due to lower corporation tax rates, on the basis that this would make them less competitive and less attractive to large US tech companies. The OECD’s tax director, Pascal Saint-Amans, reportedly called suggestions to tax revenue “daft”.
The EU commission, meanwhile, put forth its own tax proposals in a report published prior to the summit, recognising that current tax laws were outdated and not “fit for purpose” in the digital age. The report stated that modern day technology companies pay less than half the tax that traditional brick and mortar companies do; international digital business models pay on average 10.1% tax rate in the EU compared with a 23.2% tax rate for traditional international business models.
Last year Apple was ordered to pay €13bn in back taxes to Ireland after the European Commission found that Apple was allowed to pay a tax rate of less than 1%, much below the country’s corporation tax rate of 12.5%. The decision is disputed by both Apple and Ireland. Amazon is also expected to be slapped with a fine to pay back taxes in Luxembourg.
The tax overhaul is aimed at addressing the challenges concomitant with the emergent digital economy, which has transformed traditional business models. The report explains that modern digital businesses rely heavily on “hard-to-value intangible assets, data and automation, which facilitate online trading across borders with no physical presence”. This lack of a physical presence makes it difficult to establish the tax base and allows companies to provide services in countries in which they are not taxed.
The EU commission’s “preferred solution” is a Common Consolidated Corporate Tax Base (CCCTB), which has been on the table for some time. This would see a single set of rules used to calculate companies’ taxable profits in the EU, but retain national tax rates. Under these rules, companies would need to file only one tax return for all EU activities and the consolidated taxable profits would be shared between member states in which the company is active. The report elaborated that allocating profit would be done “using the formula apportionment approach based on assets, labour and sales that should better reflect where the value is created”.
The UK has been among the countries opposing this proposition, but due to the UK’s looming departure from the EU, European commissioner in charge of tax policy Pierre Moscovici excluded the UK in a statement calling for the 27 remaining EU countries to find consensus.
In 2018 the Organization for Economic Cooperation and Development (OECD) is due to present an interim report on the taxation of the digital economy to the G20 which will outline new tax proposals. The EU Commission expects these to have “a high level of ambition”.
The EU Commission hinted frustration with the lack of international progress on these issues, which it said has been “quite weak up to now because of the multitude of actors and a lack of consensus in the international debate.” While international consensus would be preferable, the EU made clear that it would be prepared to take action without the international community, stating: “In the absence of adequate global progress at the OECD, EU solutions should be advanced within the Single Market and the Commission stands ready to present the appropriate legislative proposals. “
In the meanwhile, the EU report outlined three potential short-term solutions. First, “equalisation tax on turnover of digitalised companies”, which would be a tax on all untaxed or insufficiently taxed income generated from digital business activities. The second proposal suggests withholding tax on digital transactions, which would be “a standalone gross-basis final withholding tax on certain payments made to non-resident providers of goods and services ordered online”. Finally, the report suggested a “levy on revenues generated from the provision of digital services or advertising activity”.
Both France and the EU Commission’s proposals have been met with apprehension from the international community over concerns they will put the EU at a competitive disadvantage and chase away foreign investment. Moving forward with any such proposals will prove difficult without EU-wide concord, and only time will tell whether consensus on these issues can be reached.