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Digital Tax: How Europe Plans Will Hit U.S. Tech Firms

How Europe’s Digital Tax Plans Will Hit U.S. Tech Firms. France and Britain are hatching plans to tax the revenue, rather than the profit, of companies such as Facebook Inc. and Alphabet Inc.’s Google that make their sales primarily in cyberspace. They’re the first of potentially several countries in Europe implementing “digital taxes” meant to extract money from companies whose multinational earnings often escape the taxman’s grip thanks to legal loopholes and the virtual nature of their offerings. The prospect of these laws has prompted a backlash from the U.S., which is threatening to use trade tools to retaliate. Finance ministers are trying to cool the rhetoric with a coordinated global approach.

1. What’s a digital tax?

The plans being floated in Europe would generally tax sales of online advertising, electronic data and the services of intermediaries such as Uber Technologies Inc. and Airbnb Inc. that connect users to products. The idea is to focus taxation where users of online services are located, rather than on where companies base their European headquarters or book their earnings. The French law, which is awaiting final approval and would be retroactive to Jan. 1 of 2019, imposes a 3% levy on companies with at least 750 million euros ($845 million) in global revenue and digital sales of 25 million euros in France. About 30 businesses would be affected; while most of them are American, the list also includes Chinese, German, British and even French firms.

France isn’t alone among European nations in arguing that internet companies aren’t paying their fair share into public coffers. Because they’re often domiciled in other countries — including low-tax jurisdictions such as Ireland or Bermuda — and shift money seamlessly across borders, companies that sell online can easily avoid paying taxes in countries where they nevertheless make significant sales. More fundamentally, France argues that the structure of the global economy has shifted to one based on data, rendering 20th-century tax systems archaic. According to 2018 figures from the European Commission, global tech companies pay a 9.5% average tax rate compared with 23.2% for traditional firms.

3. Why not just tax profit?

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The short answer is that it’s simpler to tax revenues. Taxing profits requires establishing where earnings actually accrue, which is hard enough for any global company but even more so in the digital sector; you might book a taxi in London, for instance, but your payment could be settled in Amsterdam. Politicians also argue that taxing revenue may be the best way to squeeze money out of companies like Amazon.com Inc. that report large sales but paltry earnings. Still, it’s not straightforward to work out which revenues are linked to a specific country. To do that, French tax collectors propose to tax internet companies proportionally to their “digital presence” in the country relative to the rest of the world.

Long before France instigated its own rules, it pushed for a European Union-wide digital levy that was scrapped when four countries — Sweden, Finland, Denmark and Ireland — declined to sign off on it. The U.K. is likely next in line to implement such a tax, promising a 2% levy on the revenues of search engines, social media platforms and online marketplaces that “derive value from U.K. users,” according to a draft finance bill published July 11. The tax is set to come into force April 2020. Austria, Italy, Spain and Belgium are also considering digital levies.

5. What’s the U.S.’s complaint?

The U.S. argues that France’s tax unfairly targets American companies. As the statute neared approval on July 10, U.S. Trade Representative Robert Lighthizer launched a probe to determine whether the measure is “discriminatory or unreasonable and burdens or restricts United States commerce.” The investigation, which could last up to a year, is authorized under Section 301 of the U.S. Trade Act of 1974 — the same tool President Donald Trump used to impose tariffs on Chinese goods due to the country’s alleged theft of intellectual property. If the U.S. rules against the French tax, it could impose retaliatory tariffs or other trade limits, or even use provisions in the tax code to punish French citizens and companies in the U.S.

Transatlantic tax wars aren’t new. Apple Inc. was slapped with a 13 billion-euro bill for back taxes by the European Commission three years ago, which Chief Executive Officer Tim Cook called “political crap.” The U.S. Treasury tried and failed to sway the EU’s Apple investigation, which alleged that the company got an illegal subsidy in Ireland due to rules there governing the transfer of sales booked elsewhere in Europe. The Commission has also probed Google’s Irish tax arrangements and ordered Amazon to pay 250 million euros in back taxes to Luxembourg. Other U.S. companies, including non-technology firms such as Starbucks Corp. and Nike Inc., have also been targeted in tax probes. The EU insists that the common thread isn’t that they’re American but that they’ve used complex legal structures and intellectual property licensing to limit their tax payments.

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7. How are tech firms responding?

8. How else might this get resolved?

The Franco-American standoff could come to nothing. A multilateral negotiation is underway at the Paris-based Organisation for Economic Cooperation and Development to coordinate global taxes on digital services. France is optimistic an agreement can be reached by the end of 2019 and says it would drop its own tax if a global standard kicks in. At a meeting of Group of Seven finance ministers in France in July, the Franco-U.S. tensions eased slightly as the two sides agreed on language to advance the OECD talks. New tax rules, according to the summary of the G-7 talks, should address “highly digitalized business models.”

Source: washingtonpost

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