EU Digital Tax Plans Coming Unstuck

By Global Tax Weekly

Last week, Kevin Brady, Chairman of the House of Representatives Ways and Means Committee, issued a statement welcoming the “abandonment” of the European Union’s proposed digital services tax. However, I think that was a piece of wishful thinking on the Texas Republican’s part. The EU rarely abandons anything, least of all high priority tax initiatives. I refer you to the common consolidated corporate tax base (currently gridlocked) and the financial transaction tax (back from the dead).

However, that France, Germany, and Austria (which currently holds the EU presidency) were last week prepared to accept a watered-down digital tax proposal in return for an agreement was an indication of just how strongly certain member states (notably Ireland, Sweden, and Denmark) oppose the idea, and therefore just how unlikely it is to be implemented in its original form.

The compromise text argued that the tax should be “an easy-to-implement measure targeting the revenues stemming from the supply of digital services where users contribute significantly to the process of value creation.” It should apply, it said, “to revenues resulting from the provision of certain digital services only.” However, the fact that the EU is insistent on a revenue tax may be at the heart of the problem.

As has been pointed out many times since the European Commission went rogue on digital taxation and published its controversial proposals last March, taxes on revenues just aren’t the done thing. The US Senate Committee on Finance warned in its recent letter to EU leaders that such a tax would violate “the long-held principle that taxes on multinationals should be profit-based, not revenue-based.” They also stated that the EU “already has a revenue tax based on the location of customer,” in the shape of VAT, meaning that the digital services tax would lead to the double taxation of multinational companies.

Where the EU goes from here with the digital tax is unclear. In a sense, it’s a bit like Brexit; the outcome could end up being very different from the original idea. What’s more certain though, based on the post-meeting comments, is that the EU hasn’t given up yet.

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