The EU’s proposed Digital Services Tax: A Defining Moment for Global Tax Reform?

The issue of unfair tax practices has been making headlines for quite some time. In March 2018, the EU unveiled its most far-reaching reform on tax to date – dual proposals to tax the digital economy. The long-term solution aims to create a virtual permanent establishment. The interim solution meanwhile proposes to apply a 3% tax rate on the turnover (not profit) on digital services where users of those services are involved in value creation, such as selling advertising and user data. Discussions are only focusing on the interim solution for now.

In the immediate aftermath of the proposals being released, larger Member States including UK, France, Germany, Italy and Spain all gave their approval. Now however the mood has changed. Technology companies such as Google, Amazon, Facebook and Twitter are clearly the target of the tax. Needless to say, American opposition to the proposal has been strong. The US has agreed on the need to reform the tax system to make it fit for purpose, but argues that this should be done internationally at OECD level, and that the EU approach is discriminatory towards American companies. It has threatened retaliatory measures if the tax is adopted. As a result, the momentum behind the proposal has slowed. Germany in particular has cooled on the idea. Germany’s large trade surplus is the guiding influence here. This year, Germany is projected to export €258 billion more in goods than it imports. Several Member States have also called for work to be taken forward at the OECD level rather than EU. They fear that going forward on an EU basis will make Europe less competitive and risk fragmentation.

France is the leading force still pushing for the tax to be agreed however. Such is France’s commitment to reaching agreement that despite previously threatening to block any attempt to include a sunset clause, it proposed exactly that at the meeting of EU Finance Ministers in early September. The sunset clause will ensure the tax will come to an end when agreement is found on the international solution. It has failed to convince some sceptical Member States such as Ireland and Finland however. In their Meseberg declaration in June, France and Germany called for European leadership on tax reform, including digital tax. Now all eyes are on Germany and we await an answer to the question if it will put its money where its mouth is. If it throws its weight behind the proposal, then other Member States may be convinced to fall into line. Ireland, for example, may come under political pressure from the Commission in light of Brexit negotiations. Keep an eye on the meeting of EU Finance Ministers at the 2nd October ECOFIN where the issue is expected to be discussed.

Danny O'Connell