Sundar Pichai, chief executive officer of Google Inc., speaks during a Google product launch event in San Francisco. (Photographer: Michael Short/Bloomberg)

EU Digital Tax Is Back and as Wrong as Ever

(Bloomberg View) -- The idea of a European "digital tax" on tech revenues just won't go away. Next week, the European Commission will formally propose the levy, and though it faces stiff opposition from low-tax countries such as Ireland and Luxembourg, the proposal isn't necessarily doomed.

Last fall, the European Union's largest continental economies -- Germany, France, Spain and Italy -- came out in favor of the turnover levy they dubbed an "equalization tax." According to EU data, the effective corporate tax burden for a traditional company is 23 percent, but digital ones are just 10 percent. Aggressive cross-border tax planning can further drive that figure down to zero, especially when firms pick business-friendly jurisdictions like Ireland for their European headquarters. If Google, Facebook, Apple and other multinational tech platforms can't be forced to pay corporate taxes everywhere they operate, it doesn't mean they should be able to get away with paying nothing, the nations reasoned. 

The "equalization" part meant forcing them to give up enough of their revenue in each EU country to cover that member state's lost corporate tax revenue. The proposal ultimately garnered the support of 19 EU nations. The low-tax ones, as well as the U.K. and Sweden, refused, voicing concerns about stunting growth in the digital sector. At a "digital summit" in Tallinn at the end of last September, no consensus was reached. "We are committed to a global change of taxation rules and to adapting our own tax systems to ensure that digitally-generated profits in the European Union are taxed where the value is created," the summit's concluding document read. "Further discussion is needed on the modalities of establishing such a system."

The equalization tax idea appeared to fizzle out until this year. Now, it has better chances of adoption by some, if not all, European countries. Even the U.K., an early opponent, is looking into imposing a digital revenue tax of its own after a government review.

As for the EU, its draft proposals started leaking out last month. First, a temporary solution favored by France and Germany sought to tax revenues from digital advertising, the sale of user data and digital intermediation at a rate between 1 percent and 5 percent. Subscription services such as Netflix, fintech firms and digital content creators wouldn't be hit with the levy. 

Most recently, the Financial Times reported the EU was "most likely" to set a new levy at 3 percent. The shape of the proposal is obviously still fluid. 

It would require a unanimous vote of the 28 member states, and the low-tax countries are still dead set against it. But the "equalization tax" idea's survival despite previous setbacks means the bigger European economies are serious enough about it to keep up the pressure. What may emerge is a solution in which a number of countries agree to implement the tax, leaving the objectors behind. As long as all the big economies are for it -- and they appear to be -- it would be nearly the same as an all-EU tax for digital companies.

On the other hand, at a 3-percent rate, there's not much for Ireland, Luxembourg or Cyprus to object to. According to the EU, such a tax will only generate 4.8 billion euros ($5.9 billion) a year across the EU. That's about a quarter of all the taxes Germany alone collects in an average month. It'll cut somewhat into the tax revenues of countries where Big Tech's EU subsidiaries are domiciled, but it won't leave a massive hole given these jurisdictions' tax rates.

Last year, Facebook made $9.9 billion in revenue in Europe. A 3-percent tax on that would cost it some $297 million. At Ireland's statutory corporate tax rate, 12.5 percent, that payout would mean a loss of $37 million a year for Ireland -- if Facebook still booked all its EU revenue and profit there. Starting this year, however, it no longer does that: It's preparing to pay more taxes where it actually does business. So while the Irish subsidiary is still the company's European tax hub, it's already losing some Facebook money to other EU countries.

Whatever happens, however, the turnover tax will remain a bad idea. 

EU quick fixes tend to stick around. The current value-added tax rules were adopted as a temporary measure back in 1993. Do the bloc's most powerful nations really need the less than 5 billion euros so much that they're willing to be stuck for years, perhaps decades, with a blunt-instrument turnover levy? Wouldn't it be more farsighted to work actively with the multinationals to have them structure their operations so they'd pay more corporate tax where they make the profits?

Facebook has already proved amenable to such pressure, and others can be nudged toward the same path. There's no real need for a quick-and-dirty solution -- a fair and logical one would be far better, and it wouldn't necessarily require a major global or even EU-wide tax reform. Faced with clear demands, other tech giants would probably end up complying voluntarily rather than face constant sniping from politicians and an uncertain tax bill.

As Google Chief Executive Officer Sundar Pichai put it in January, "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." 

That, and not temporary turnover taxes, should be the subject of debate.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.

©2018 Bloomberg L.P.

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