Opinion

Why the EU Digital Tax is Wrongheaded for US and Europe

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Posted: Feb 25, 2019 12:01 AM
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Why the EU Digital Tax is Wrongheaded for US and Europe

Source: AP Photo/Alastair Grant

The European Union’s ambitions for a digital services tax—which would disproportionately hit American companies--reportedly isn’t close to reaching its ambitious March deadline, touted by French Finance Minister Bruno Le Mair. However, the goal is still there and would likely harm both the U.S. and EU economies.

Think South Dakota v. Wayfair, the Supreme Court ruling last year allowing states to tax Internet sales, but this time on an international scale. Only, it’s national governments making a revenue grab.

In a rare show of bipartisanship in Washington, Senate Finance Committee Chairman Charles Grassley, R-Iowa, and ranking member Sen. Ron Wyden, D-Ore., wrote a letter calling for the Treasury Department to shield U.S.-based technology firms from being targeted by foreign tax schemes.

“We write to express our serious concern regarding unilateral action by foreign countries to establish digital services taxes designed to discriminate against U.S.-based multinational companies,” the senators’ Jan. 29 letter to Treasury Secretary Steven Mnuchin says. “It is important that you make clear to the representatives of these countries the need to abandon unilateral actions and work through the multilateral process at the Organisation for Economic Co-operation and Development (OECD).”

The OECD announced this year it plans to “address the tax challenges of the digitization of the economy,” but it’s not clear it offers the same solution as EU bureaucrats. The OECD determined in a 2014 paper that because “the digital economy is increasingly becoming the economy itself, it would not be feasible to ring-fence the digital economy from the rest of the economy for tax purposes.”

The tax would disproportionately hit U.S.-based technology companies, but also inhibit growth of emerging European firms, harm tax competition among nations, and discriminate against one industry. Another thing: It could likely bait President Donald Trump to slap more tariffs on Europe.

The European Commission unveiled two proposals last spring. The more long-term proposal would “tax profits that are generated in their territory, even if a company does not have a physical presence there.”

The other proposal would be to impose an “interim tax” on “those activities which are currently not effectively taxed.” This one sounds rather wide open for interpretation, but amounts to requiring mostly American-based tech giants—such as Facebook, Twitter, Google and Amazon—to pay a 3 percent tax on their revenues in each country where they make money. The European Commission projects this would produce €5 billion ($5.8 billion) in annual revenues for 28 EU member states.

Some of Europe’s largest economies, Britain, France, Spain and Austria, have either adopted or are considering digital tax policies. However, EU members Denmark, Finland, Luxembourg, Malta and Sweden were cold to the idea. These countries host some large tech companies, and fear a negative impact on their domestic economies. German business and manufacturing groups criticized the plan.

Irish Finance Minister Paschal Donohoe said to EU counterparts, “What kind of reaction would this bring if this was a model that was imposed on us?” Ireland—known and even scorned in Europe for its low tax rates—has the European headquarters for Apple, Facebook, and Google.

The occasional mischief and political censorship these U.S. tech giants should be held accountable for is another discussion that can be dealt with in another way.

In October, then-Senate Finance Committee Chairman Orrin Hatch, R-Utah, and Wyden, wrote

European Council President Donald Tusk and European Commission President Jean-Claude Juncker, asserting the proposal: “has been designed to discriminate against U.S. companies and undermine the international tax treaty system, creating a significant new transatlantic trade barrier that runs counter to the newly launched US and EU dialogue to reduce such barriers.”

The digital tax has the whiff of a tariff, contends the Peterson Institute for International Economics, because the bulk of revenue would be from multinational corporations. The Trump administration has already applied a little-used provision of a 1974 trade law allowing retaliatory tariffs on countries with “unreasonable, discriminatory, or unjustifiable” trade barriers. This could likely easily fit that definition.

The stated goal of the EU tax proposal is to harmonize the economic policies. But why harmonize? Uniform taxation policies would undermine tax competition for the sake of attracting companies. As more countries seek the most pro-growth policies, it benefits their citizens. Some European countries might well find it in their best interest to adopt a digital systems tax, but this isn’t something that shouldn’t be forced EU-wide.

A 3 percent tax on revenues of Google, Amazon and other giants may not seem so inhibitive. But, the tax policy would be particularly burdensome on small companies with slim profit margins. These firms would effectively face direct and indirect tax rates of more than 50 percent of their revenue, according to summary last fall by the European Policy Information Center. Thus, the new expenses would stifle the growth of emerging European companies, making for a less competitive business environment.

As enthusiastic as Le Maire seems about the matter being settled shortly, the better route would be to defeat the proposal altogether as quickly as possible.