Vulcan Insight

Europe gets serious about digital taxation

24 January 2020

After years of infighting, EU countries may finally be ready to tax digital companies fair and effectively.

Today, the internet has become a force driving the global economy and society. It shapes how we search content and do research, communicate with each other, and develop new technologies that streamline and automate our economy.

More than ever, the services industry, particularly digital services such as cloud service providers, forms an underlying backbone to today’s industry. However, while the digital transformation has streamlined and increased overall economic output, their intangible assets as well as outdated national and international fiscal legislation, often case allows digital companies to shift their profits between different tax jurisdictions.

Following years of some member states such as Ireland, Luxembourg and the Netherlands blocking any substantial progress on digital taxation at the EU-level – the Commission had first proposed a tax reform package in March 2018 – there are now slow, but steady steps seeking to effectively tax digital companies.  

With digital companies able to quickly move assets spanning multiple tax jurisdictions, a majority of countries, such as those opposing an EU-only solution, call for an international solution. Such a solution, they argue, while taking longer to put in place and undoubtedly involving international compromises, will prevent companies shopping for their preferred tax jurisdiction.

With representatives of 134 countries meeting at the OECD’s Paris headquarters next week to find a compromise on global digital tax rules, the EU Finance Ministers, led by France, Germany, Italy and the UK, on Tuesday, rejected a watered down US proposal which would have made any OECD-agreed rules optional. Reiterating Ministers decisions, Commission Executive Vice President Valdis Dombrovskis told reporters that “tax, by definition, is a compulsory payment.”

Meanwhile, with an OECD solution not expected before a June deadline, the European Commission is gearing up to revive its 2018 EU-only solution by the end of the year. Although detailed discussions are yet be established, it can be expected that any von der Leyen Commission proposal will be based on the latest March 2019 Council compromise text, which, at the time, did not achieve the required unanimous approval.

Yet, a number of member states, unwilling to wait, have since decided to implement domestic digital tax laws. France and Italy (both 3%), Austria (5%) the Czech Republic (7%) all have passed legislation levying duties on domestic digital profits from 2020 onwards. This decision has received scathing criticism from the United States, which has threatened substantial retaliatory tariffs should any of these duties be levied on US companies. Responding to the French plans, in particular, the US launched substantial actions threatening up to 100% tariffs on French goods, including wine.

Despite Presidents Macron and Trump reaching an agreement this week on deferring the duty collection and tariffs, the European Union is set to get serious this year on taxing digital companies.