The European Commission has recently proposed new tax rules that would significantly alter the tax regime faced by technology companies operating in the European Union, including American tech giants like Google and Facebook. The proposal from European authorities would tax tech company revenues in the country where those revenues are generated rather than where the companies are regionally located; supporters of the proposal note that this would keep tech companies from reducing tax payments by locating regional headquarters in European nations with lower tax levels.
According to the proposal published by the European Commission, a digital platform would be deemed to have a taxable presence in a member state if it meets one of the following criteria: more than €7 million ($8.7 million USD) in annual revenues from a member state; more than 100,000 users in a member state in a taxable year; or the creation of more than 3,000 business contracts for digital services created between the company and business users within a taxable year.
Along with this common reform proposal for the EU’s corporate tax structure, the European Commission is also proposing an interim tax on revenues stemming from certain digital activities which escape the current tax regime entirely. This would include taxes on revenues created from selling online advertising space; revenues from digital intermediary activities which can facilitate the sale of goods and services across users on a digital platform; and revenues from the sale of data from user-provided information. These taxes would only be applied to companies generating worldwide annual revenues of more than €750 million ($930.4 million USD) an annual EU revenues of €50 million ($62 million USD). Such revenues would be taxed at a rate of 3 percent and could generate a total of €5 billion ($6.2 billion USD) in tax revenues each year for the EU.
As a Wall Street Journal article on the proposed digital tax notes, the proposed digital tax structure would likely have its greatest effect on American tech companies like Amazon, Alphabet and Facebook. In 2016, the European subsidiaries of these American companies each generated well over $1 billion USD, putting them deep into the newly proposed EU tax environment. The European Commission has said that the new rules are designed to ensure that globalized tech companies, which account for a much larger portion of the world’s largest tech companies over the past decade, contribute their fair share of taxes, arguing that such companies have a tax rate that is effectively half the rate paid by businesses in traditional industries.
This is not the first time that the EU has acted based on the argument that foreign tech companies are trying to shield themselves from paying their fair share of European taxes. In August 2016, the EU’s antitrust regulator ordered the Irish government to recoup up to €13 billion ($14.5 billion USD) in unpaid taxes which the EU argued was owed after the Irish government offered unfair tax breaks to Apple. A month later, both Apple and the Irish government were planning to appeal the EU’s fine on charges that European regulators failed to inform them of any change in objective regarding the probe, which the EU reportedly started in 2014 and was initially related to intellectual property matters. In October 2016, an Italian judge settled charges that an Ireland-based Apple executive failed to pay €879 million ($1.1 billion USD) in taxes to the Italian government, converting a six-month jail sentence for that executive to a €45,000 ($49,126 USD) fine. Last November, the EU asked Apple to provide more details regarding the tax structure which the company faces in Europe after allegations that Apple moved its European headquarters from Ireland to the island of Jersey in order to continue avoiding its EU tax obligations.
In the days leading up to the European Commission’s announcement of the new digital tax measures, U.S. Treasury Secretary Steven Mnuchin issued a statement in which he noted that the U.S. was firmly opposed to tax proposals by any country that singles out digital tech companies:
“Some of these companies are among the greatest contributors to U.S. job creation and economic growth. Imposing new and redundant tax burdens would inhibit growth and ultimately harm workers and consumers. I fully support international cooperation to address broader tax challenges arising from the modern economy and to put the international tax system on a more sustainable footing.”
The comments from Mnuchin follow a few weeks after reports that tech industry groups were urging the Treasury Secretary to push back against the EU’s plans to institute a digital tax.
The European Commission’s digital tax proposal is simply the latest salvo between international economies in what some commentators have likened to a potential trade war. Such concerns began in early March when President Donald Trump announced international tariffs on steel and aluminum being shipped into the U.S. On March 8th, President Trump formally approved a 25 percent tariff on steel and a 10 percent tariff on aluminum to be levied against every country except China and Mexico, countries which are currently involved in NAFTA renegotiations. In response to the steel and aluminum tariffs, reports from early March indicated that the EU was considering tariffs on American bourbon, Harley Davidsons and Levi’s blue jeans in an apparent move to pressure political leadership in Congress.
Economic squabbles have also been heating up between the U.S. and China, especially in the area of intellectual property. Along with the steel and aluminum tariffs, which came largely in response to allegations that oversupply from China has affected global markets, the Trump Administration opened a probe last August into deceptive and unfair trade practices by the Chinese government regarding foreign IP owners. In late March, reports indicated that President Trump planned to impose up to $60 billion in tariffs on goods shipped from China to the U.S. as a reciprocal measure to counteract China’s IP theft.
As for the EU’s digital tax, the legislative proposals will be submitted to the European Council for adoption and then the European Parliament for consultation. The European Commission is also expected to “push for ambitious international solutions” on digital taxation in conversations within the Group of 20 (G20) and the Organisation for Economic Co-operation and Development (OECD).