Following the European Union’s announcement last week of a new set of rules governing taxation for tech companies, several governments, banks, economic analysts and tech companies have voiced their concerns over this initiative.
European Banks Oppose EU’s Digital Tax
The European Banking Federation (EBF) criticized the EU for going solo with these efforts and failing to involve others actors in implementing a global level-playing field.
The EBF said in a press release: “As main actors in the digital single market, banks take note of the new approach on digital taxation adopted by the EU. Unilaterally introducing new rules in the international corporate income tax framework and adopting an interim Digital Services Tax can challenge the way the digital economy is currently evolving.”
“The EBF expresses its support to the forward-thinking approach adopted by the OECD/G20 in their Interim Report of March 16, which aims to deliver a global consensus on the taxation of the digital economy. This OECD Report recognizes that ring-fencing digital activities and services for tax purposes may prove to be extremely difficult and may have unintended consequences such as double taxation.”
Furthermore, the press release explained that “existing OECD guidelines on the attribution of profits to permanent establishments with regards to banking activities very clearly set out the rules to be followed by financial institutions,” and “profits are taxed according to the creation of value generated and the risks taken by each entity involved in cross-border transactions.”
Hence, “any specific tax on digital banking activities would be a surcharge tax which would be added to the existing corporate income tax (and VAT or hidden VAT cost) and would result in double taxation.”
German Media Giant Rejects EU’s Digital Tax, Citing Double Taxation
German media company Bertelsmann also rejected this decision, explaining that the digital tax might be worse for Europe as a whole than for the American tech companies affected.
CEO Thomas Rabe explained that the digital tax could lead to companies like his being double taxed.
“We would effectively be taxed twice. That is a concern,” said Rabe before a group of journalists in Berlin.
Rabe added: “In principle we are very much in favour of establishing a level playing field between the US tech companies and us, and one aspect of that is tax…[but] we already pay normal direct taxes and tax rates in all the countries in which we operate. We would be penalised by the tax structures that the Gafa companies have put in place. It would be quite inappropriate.”
Government Officials & Economic Analysts Raise Doubts Over EU’s Digital Tax
At a national level, Luxembourg’s Minister of Finance Pierre Gramegna believes large tech companies like the GAFA group should be taxed, albeit it should not be done unilaterally.
Gramegna said that going about it “alone” and without the support of the OECD or G20 would be detrimental to Europe.
Furthermore, Paul Falvey, a Tax Partner at BDO LLP, voiced his concerns in a Bloomberg piece on the impact the digital tax might have on the UK.
Falvey says the digital tax “is a blunt instrument which does not properly take into account the profitability of the company or the stage of its evolution and investment cycle.”
For instance, he explains, “start-up companies make little taxable profit but, under these proposals, could be highly taxed—which could severely hamper their growth prospects.”
Despite these shortcomings, Falvey believes the UK government will ultimately move forward with “a turnover based tax” even if it’s “on a unilateral basis.”
Finally, Ryan Bourne, the R Evan Scharf Chair in the Public Understanding of Economics at the Cato Institute in Washington DC, thinks the digital tax is bound to fail.
In a City A.M. op-ed, Bourne writes that the proposed digital tax “throws up all sorts of problems, some of which require further carve-outs and convolutions of the tax system.”
“For starters, new, upcoming digital companies going global for the first time would now have to navigate and structure their businesses according to two completely different types of tax base, beyond the ordinary compliance costs of operating across countries,” he explains.
Furthermore, Bourne says, the digital tax “would be particularly destructive to digital businesses with very high turnover but low margins, which is often the case when firms are expanding and trying to build big networks.”
Additionally, Bourne suggests, considering that “entrepreneurial new products or services bring with them substantial uncertainty over whether they will be profitable or loss-making ventures…adding in a new tax cost associated with revenue generated by a new idea could deter investment in new services across the board.”