Europe's Digital Tax Is a Bad Idea

(Bloomberg View) -- The European Commission's proposed tax on digital services is intended to make companies such as Google and Uber pay more. The idea is that such firms are gaming the rules at the expense of other taxpayers. The issue is real and needs to be addressed -- but the answer under discussion breaks with both established international practice and plain common sense.

Formal talks on the plan are due to start this week. The commission is calling for a 3 percent tax on the turnover of large digital enterprises -- those with EU digital revenues over 50 million euros ($40.5 million) and total global revenues of over 750 million euros. About half the companies affected would be American, the EU estimates.

The commission says it has been left with little choice. The value generated by digital companies doesn't require a physical presence, making them harder to tax. Digital businesses arrange their affairs to exploit this: They allocate income to low-tax jurisdictions and, according to officials, end up paying an effective tax of roughly 10 percent of profits, less than half of the burden carried by traditional businesses. (One recent study disputes these numbers.)

Officials acknowledge that the right solution is a thorough overhaul of the corporate tax code, especially as it affects international firms selling digital services -- and that this should be done not unilaterally but in cooperation with other countries, notably the U.S. Efforts are in fact underway, but progress has been slow, and EU officials have chosen to do something, anything, as soon as possible.

Doing nothing would be better than this. For a start, the plan wouldn't raise much revenue -- a meager 5 billion euros each year. And this supposedly fairer tax would create many new anomalies. For instance, companies such as Uber that don't make money will have a new cost to absorb; highly profitable firms with market power, such as Facebook, will be able to pass the tax on to their consumers. Small startups will be exempt from the new tax -- unless they're acquired by larger companies. That will discourage consolidations. And the proposal as it stands may tax more activities than intended: Some financial services, for example, seem to be within its scope.

In its zeal to tax Big Tech, the commission swerves around many of its own stated principles. Its plan would probably require accessing individual, not just anonymized, user data. This runs counter to the EU's stringent new rules on privacy, coming into force next month.

Efforts to design a multinational solution need to be stepped up, not set aside. The goal should be a fair, multilateral framework that recognizes the complexity of the new digital economy while respecting the sovereignty of nations to set their own tax policy. That's an international challenge demanding an international solution.

--Editors: Therese Raphael, Clive Crook.

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