EU’s Digital Tax Plans Foster Further Criticism

By Global Tax Weekly

If I was to say “would those who actually think the EU’s digital taxation plans are a good idea, please stand up” I’d be willing to bet that most of you would be still sitting comfortably. At least those who have an understanding of these issues. Because, as the catalogue of criticism of the European Commission’s digital tax proposals mounts, so too does the list of business associations, economists, and EU member states expressing skepticism and concern about the idea. The way things are going, soon Jean-Claude Juncker and Emmanuel Macron will be only the ones left standing.

One wonders how long the EU will continue to push the digital tax, given that in April reports emerged following an informal meeting of EU finance ministers that France was in a minority of one in fully supporting the proposals. Does this mean even Germany, normally a driving force behind new EU tax initiatives, isn’t hugely keen on it either?

More recent developments suggest those reports might have been over-egged somewhat. Italy and Spain are now looking at advancing digital measures possibly mirroring the EU’s interim sales tax. Furthermore, France and Germany have just committed to reaching an EU agreement on “fair digital taxation” by the end of 2018, although what that means exactly is anyone’s guess at present.

And we’ve seen how persistent the EU can be in pursuing technically and legally questionable tax measures. The wheels seemingly fell off of the financial transactions tax before the vehicle had even left the forecourt, and the remaining member states have spent the last few years pulling it apart and trying to put it back together again, mostly unsuccessfully. So, it would be premature to write off the EU digital tax just yet.

It’s perhaps dangerous to dismiss EU corporate tax harmonization too, even after France and Germany issued, as part of the Meseberg Declaration, a plan for what looks like the EU common corporate tax base on steroids. Too much political capital has been invested in this proposal by its proponents to kick it into the long grass a second time around, even if it might need what would amount to a third relaunch following France and Germany’s new contribution to the project. Discussions may well drag on for years, but this is clearly a political investment for the long-term, tied up as it is with the Franco-German push for the next phase of EU integration.

One of the main issues with the CCTB is that there will be winners and losers. When consolidation is eventually added to the mix (making it the CCCTB), small member states fear losing out under its formulary apportionment system, which would replace the arm’s length standard underpinning transfer pricing regimes and instead revenues would be distributed among member states based on factors tied to a company’s economic substance in each member state.

Under such, the bulk of revenues can be expected to be siphoned off to the larger member states, in which multinational companies make most of their sales. The other factors – the location of a group’s assets and its workforce – would be more fluid and allow for competition between member states most notably on the effective corporate tax rate applied to the common base. What that would mean is that although effective corporate income tax rates will matter, there will be less room for competition under the CCCTB, and in particular if tax breaks for research and development activities are excluded (as proposed by Germany and France), much to Ireland’s disdain. Perhaps this is why France is such a strong supporter of the measure.

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