OPINION: European Digital Taxes Take Aim At American Companies

Jack Taylor/Getty Images

Andreas Hellmann Americans for Tax Reform
Font Size:

American entrepreneurship is unquestionably leading in the world. Most recent technology and software was invented here, and now the European Union wants to tax exactly that.

A proposed EU-wide digital services tax poses unprecedented dangers to tax competition and economic growth. The new tax represents a dramatic and irreversible shift for the international tax system. It means damage to the transatlantic relationship and could lead to a spiral of retaliation.

The EU intentionally designed this tax in a way to almost exclusively target American companies as there is no comparable digital industry anywhere in the European Union.

In a recent interview with “Le Journal du Dimanche,” the French Finance Minister Bruno Le Maire said he expects the European Union to agree on a digital services tax by the end of March.

The EU member states have to unanimously agree with the EU Commission’s proposal but couldn’t even reach a consensus for over a year thanks to many EU member states such as  Luxembourg, Sweden, Denmark, Finland, Malta and Ireland actively opposing the plans to impose this tax.

Low tax countries like Ireland and Luxembourg are hosting tech and other foreign companies and are fighting to maintain a competitive tax system within the EU.

The tax targets mainly American tech companies like Uber, AirBnB, Amazon, Facebook, and Google, even if they are not physically present in the EU, potentially taxing them close to five billion euro ($5.7 billion). Companies with annual worldwide revenues above 750 million euro ($924 million) or yearly “taxable” revenues above 50 million euro ($57 million) in the EU could face a 3 percent tax on their turnover—in most cases the gross revenue.

The plan would erect a new tax regime, as the tax would be levied by the countries where the digital users are located, not based on where the companies are physically present.

But even if the EU cannot reach a unanimous agreement many European member states have already implemented their own local digital services taxes modeled after the EU proposal.

Italy adopted a 3 percent digital tax on revenues from digital services provided to Italian companies at the end of 2017 and will be effective in early 2019.

Spain’s government has also proposed a budget that includes a digital services tax, starting in 2019. Similar to the Italian proposal, it would be a 3 percent rate on revenues from specific digital services following the EU proposal to only impose the tax to companies with more than 750 million euro ($850 million) in total annual worldwide revenues and local revenues of more than three million euro ($3.4 million).

France imposed their own local digital services tax in January 2019 taxing not only the revenue but also earnings from digital advertisement. French Finance Minister Bruno Le Maire, who said at an informal meeting, “We want to tax American tech giants, but certainly we don’t want the Chinese to tax Louis Vuitton,” expects over 500 million euro ($570 million) in additional tax revenue — money that the French government desperately needs to expand the welfare state to calm down the Yellow Vest movement and their demands. Of course, budget cuts are not an option in overspending France that has not reduced its budget in over 15 years.

Even the United Kingdom — always claiming to have a very special friendship with the United States — is jumping on the train. Chancellor Philip Hammond announced a 2 percent tax on revenues for companies with more than £500 million ($658 million) revenues from digital services in the U.K. The first £25 million ($32 million) in revenues would be exempt from tax and coming into force in April 2020 raising more than £400 million ($526 million).

The European Commission’s interest is not to increase competition between the member states but to “harmonize” taxation within the EU and is therefore strongly pushing to put an end to the veto power member states have over EU tax matters. This approach is poison for the very different and diverse member states, differences between different locations comprise many factors, and it is obviously not the same to operate a business in Luxembourg or one in rural Ireland.

Nevertheless, Bruno Le Maire shows his determination in the interview saying that there were still some “hesitant countries,” but he is convinced there will be agreement by the end of March and “with the European elections just a few months away, our citizens would find it incomprehensible if we gave up on this.”

It is also a myth that American companies are not “paying their fair share” as the European Union Claims. In many cases, digital companies pay even more in taxes than non-digital enterprises. Not to forget how European countries and their economies are benefitting from American innovation, expansion, and employment.

Though the former Senate Finance Committee chairman Orrin Hatch (R-Utah) and ranking member Ron Wyden (D-Ore.) opposed the European Union’s plan for a Digital Services Tax and addressed their concerns in a letter last October it is now time for Congress and the Trump administration to step up their opposition further and make their voices heard.

Andreas Hellmann (@AHellmann) is program manager at Americans for Tax Reform, a nonprofit group dedicated to lower taxes and limited government.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.