The European commission proposed their plan to levy a tax on tech companies not where their headquarters are, but based on the location of their users. The plan would allow member states to tax the companies based on the profits that have been made in their territory, independent of the physical presence of the company. However, there are some restrictions: the company must have revenue of more than 750 million a year, least 50 million of which must come from Europe. This means that the possible tax will impact the biggest tech firms, which are currently paying a negligible amount because they are headquartered in low-tax EU countries like Luxembourg and Ireland. Moreover, in order for the company to be taxed from a European state, it should have a revenue generated in that country of above 7 million euro or it should have more than 100,000 users or more than 3,000 business contracts that are made between the company and its users in a given country in a taxable year. This threshold will affect an estimated about 150 companies, half of which are US and a third European.
As of now, the five major European powers favour the tax, which they have called an “equalization tax” because it will force tech companies to give a part of their revenue to EU member states which have lost the corporate tax revenue. This tax’s ultimate purpose is to create uniformity within the EU market until the Organization for Economic Cooperation and Development takes more decisive actions on that matter and a long-term solution is put into use. The tax also sends a major political signal which aims at showing the tech companies that they can’t create their own rules of operation and that from now on the EU would demand a higher degree of competition and tax transparency.
Right now digital companies pay 9.5% tax rate, while traditional business pay 23.2%. The tax will most likely be around 3% which means that, if member states apply it, it would generate 5 billion euros per year. The tax will mostly apply to revenues which are made from actions where users have a significant role in value creation and which at the present tax laws are very hard to catch. The tax would impact companies which collect data and use it in order to sell “ad spaces”– like Facebook, Twitter and Google – and companies that are intermediaries for online transactions – like EBay and AirBnB. Further, firms that have a monthly subscription, like Spotify, which is one of the biggest European tech firms, will have to pay too. Nevertheless, telecom services and streaming providers, like Netflix won’t be affected and e-commerce companies, like Amazon, will be minimally impacted.
But, how hard would the tax hit companies and low-tax EU countries? Lets’ take Facebook, for example, which made $9.9 billion revenue in Europe: a 3% tax would mean that it has to pay $297 million. Right now it pays Ireland’s corporate tax of 12.5%, which means that Ireland will lose 37$ million a year, that is if Facebook still registers its EU revenue and profit there, which it wouldn’t do if it has to pay more taxes where it performs its business. For Facebook an approximately $300 million tax is almost the whole foreign tax bill it had to pay for last year. However, economists say that it would not be such a big burden for a firm which has a 39% profit margin.
The EU commissioner for tax, Pierre Moscovici, has said that “the purpose of the tax is not to burden tech giants but to make sure that digital income is brought into line with the real economy” and that it doesn’t target the US or any other nation. Moreover, he stated that the "current legal vacuum is creating a serious shortfall in the public revenue of our member states", which needs to be addressed.
As it was expected, the proposed tax faces huge opposition from the US, the home of the biggest tech companies. The US has said that this “digital tax” is a direct assault on their tech companies and some EU countries are worried that Mr. Trump’s administration might be angered by this short-term revenue tax which will widen the strain between the US and Europe.
The president of Information Technology Industry Council, Dean Garfield, expressed his views that a possible tax will injure business certainty in Europe, cooling down trade and investment from tech companies from all over the world.
The U.S. Treasury has also opposed the tax because it singles out some digital companies. In particular, Steven Mnuchin, US Treasury secretary, has expressed his views that the tax will impede growth and harm consumers and workers, as some of these companies which will be affected create a lot of jobs and are a driving force for significant economic progress.
Google CEO, Sundar Pichai, commented on the tax that “We are happy to pay a higher amount, whatever the world agrees on as the right framework. It’s not an issue about the amount of tax we pay, as much as how you divide it among various countries." So, the biggest companies have expressed their agreement to pay if this tax is more fair and logical.
The proposal of the tax has also opposition from EU member states, particularly Ireland and Luxembourg, which benefit most from tech companies which are headquartered there and which prefer to have a global solution made by the OECD, because the digital tax will make it less appealing for the tech companies to relocate or expand their businesses in their countries. Other member states also are reluctant about Brussels’ increased role on taxation and they are apprehensive about a possible “tax war” with the US.
European businesses are wary of the proposed tax as the chief executive of Bertelsmann, a big German media company, said that this idea can actually cause more burden on European firms than on US, because it will lead to double taxation for European tech companies, which have to pay taxes on their profits right now. Further, he added that the so-called Gafa companies – Google, Apple, Facebook and Amazon – are privileged in having a tax advantage that has to be dealt with, but in a way that actually creates a level playing field which this “digital tax” fails to achieve.
The digital tax is only a temporary solution until a global measure drafted by the OECD is applied. However, the organization is taking too much time to react, which has made the officials of the European countries frustrated. That’s why the European Union thinks that their interim tax will force a quicker world action, but economists believe that it could lead to retribution from other nations and bring more harms than solve problems.
As of now, the five major European powers favour the tax, which they have called an “equalization tax” because it will force tech companies to give a part of their revenue to EU member states which have lost the corporate tax revenue. This tax’s ultimate purpose is to create uniformity within the EU market until the Organization for Economic Cooperation and Development takes more decisive actions on that matter and a long-term solution is put into use. The tax also sends a major political signal which aims at showing the tech companies that they can’t create their own rules of operation and that from now on the EU would demand a higher degree of competition and tax transparency.
Right now digital companies pay 9.5% tax rate, while traditional business pay 23.2%. The tax will most likely be around 3% which means that, if member states apply it, it would generate 5 billion euros per year. The tax will mostly apply to revenues which are made from actions where users have a significant role in value creation and which at the present tax laws are very hard to catch. The tax would impact companies which collect data and use it in order to sell “ad spaces”– like Facebook, Twitter and Google – and companies that are intermediaries for online transactions – like EBay and AirBnB. Further, firms that have a monthly subscription, like Spotify, which is one of the biggest European tech firms, will have to pay too. Nevertheless, telecom services and streaming providers, like Netflix won’t be affected and e-commerce companies, like Amazon, will be minimally impacted.
But, how hard would the tax hit companies and low-tax EU countries? Lets’ take Facebook, for example, which made $9.9 billion revenue in Europe: a 3% tax would mean that it has to pay $297 million. Right now it pays Ireland’s corporate tax of 12.5%, which means that Ireland will lose 37$ million a year, that is if Facebook still registers its EU revenue and profit there, which it wouldn’t do if it has to pay more taxes where it performs its business. For Facebook an approximately $300 million tax is almost the whole foreign tax bill it had to pay for last year. However, economists say that it would not be such a big burden for a firm which has a 39% profit margin.
The EU commissioner for tax, Pierre Moscovici, has said that “the purpose of the tax is not to burden tech giants but to make sure that digital income is brought into line with the real economy” and that it doesn’t target the US or any other nation. Moreover, he stated that the "current legal vacuum is creating a serious shortfall in the public revenue of our member states", which needs to be addressed.
As it was expected, the proposed tax faces huge opposition from the US, the home of the biggest tech companies. The US has said that this “digital tax” is a direct assault on their tech companies and some EU countries are worried that Mr. Trump’s administration might be angered by this short-term revenue tax which will widen the strain between the US and Europe.
The president of Information Technology Industry Council, Dean Garfield, expressed his views that a possible tax will injure business certainty in Europe, cooling down trade and investment from tech companies from all over the world.
The U.S. Treasury has also opposed the tax because it singles out some digital companies. In particular, Steven Mnuchin, US Treasury secretary, has expressed his views that the tax will impede growth and harm consumers and workers, as some of these companies which will be affected create a lot of jobs and are a driving force for significant economic progress.
Google CEO, Sundar Pichai, commented on the tax that “We are happy to pay a higher amount, whatever the world agrees on as the right framework. It’s not an issue about the amount of tax we pay, as much as how you divide it among various countries." So, the biggest companies have expressed their agreement to pay if this tax is more fair and logical.
The proposal of the tax has also opposition from EU member states, particularly Ireland and Luxembourg, which benefit most from tech companies which are headquartered there and which prefer to have a global solution made by the OECD, because the digital tax will make it less appealing for the tech companies to relocate or expand their businesses in their countries. Other member states also are reluctant about Brussels’ increased role on taxation and they are apprehensive about a possible “tax war” with the US.
European businesses are wary of the proposed tax as the chief executive of Bertelsmann, a big German media company, said that this idea can actually cause more burden on European firms than on US, because it will lead to double taxation for European tech companies, which have to pay taxes on their profits right now. Further, he added that the so-called Gafa companies – Google, Apple, Facebook and Amazon – are privileged in having a tax advantage that has to be dealt with, but in a way that actually creates a level playing field which this “digital tax” fails to achieve.
The digital tax is only a temporary solution until a global measure drafted by the OECD is applied. However, the organization is taking too much time to react, which has made the officials of the European countries frustrated. That’s why the European Union thinks that their interim tax will force a quicker world action, but economists believe that it could lead to retribution from other nations and bring more harms than solve problems.
Dimana Tzonova