COVID-19 could spark change bring about a digital tax in the EU– but will the US give its support?

Article by Lea Schiller

Before COVID-19, there was a move for a so-called “digital tax” in Europe – a tax aimed at the profits generated from digital activities. Even back then, the proposal was contested, not only within the EU but also with its Atlantic partners. Then came the pandemic, and with it not only an even bigger need for these taxes, but also shifted the world’s attention away from these plans. A solution to this problem is desperately needed, especially since governments will need the revenue to revive their economies – but an agreement that both the EU and the US will agree to is going to be difficult to reach. The EU should nevertheless move forward, towards a local digital tax.

What is a digital tax, and why is it important?

The goal of the digital tax is to close the legal hole that has been left by the existing taxation system. The current system does not take into consideration the many new business models that rely on digital spaces to make revenue (European Council, 2020). Current taxation systems assume that businesses have a physical presence in the country in which they make profit. This leads to a situation in which profits are not taxed in the country in which the consumers are – a situation that the digital tax proposal intends to fix. It is a hotly contested idea, not least because the stakes are high: more and more revenue are being generated online, and this development has only been exacerbated by the pandemic. Companies like Google and Facebook have found it easy to grow their revenue, as their business model benefits from the emphasis on digital spaces. On one side, tech giants like Google and Amazon are reluctant to give up their advantage. On the other hand, states seek a way to level the playing field for their domestic companies. In contrast to big corporations in the tech industry, they have been making major losses since the pandemic has started to force governments to put their countries in lockdown.

The EU’s efforts for a digital tax: a rocky road

In 2019, France introduced a 3% digital tax that was planned to go into effect in April of 2020 but had to be pushed back after the US threatened to retaliate with tariffs on French wine (Heikkilä & Braun, 2020). Nevertheless, the move prompted other EU member states (Spain, Italy, Austria and the Czech Republic) to come forward with their own proposals for a digital tax – though none of them have been implemented yet (Heikkilä & Braun, 2020). The EU sent the European Commission to represent the Union at the OECD, which is working on a global solution, in order to avoid regional differences and prevent countries from lowering the tax rate to entice companies to move their headquarters there. However, it is unclear if – or when – the OECD will come to a decision and so France has renewed talks of an EU-wide digital tax (Reuters, 2020). With good reason – the potential revenue that could be collected from these taxes would be welcome amidst the economic fallout of the pandemic.

Roadblock US: Why it will be difficult to keep them on the negotiating table

The first draft of a solution by the OECD consists of two pillars: firstly, the goal that companies will be taxed where they make profit, and secondly, a global minimum corporate tax. The European Commission has stated that it prefers a solution to include both pillars, as otherwise not all member states will agree to it (Heikkilä & Braun, 2020). However, the US has voiced strong opposition to the first pillar. And that is not where the story ends: in June, after pulling out of negotiations with European countries, the US Treasury sent a letter to the finance ministers of the UK, France, Italy and Spain, warning them of imposing a digital tax, and to expect tariffs on their goods if they do (Fleming, Brunsden, Giles & Politi, 2020). And it is unclear if the Biden administration will change its stance on the issue. The new president will have to deal with the economic fallout of the pandemic, and the Democrats have opposed digital taxes in the past, claiming that they unfairly target US companies (Horowitz, 2020). Getting the US to agree to a settlement could be a long, drawn out process that means conflict is ahead, whether the EU moves forward with their plans of a local digital tax or not.

Moving ahead

The EU is in dire need of a solution for the digital tax problem. France’s digital tax was only pushed back until December 2020 and the country is pushing the EU to find a solution by mid-2021, should the OECD not come to a decision until then (Reuters, 2020). It is a deadline that is a chance as much as it is a risk – moving towards a regional tax in Europe could lead to tensions with the newly inaugurated Biden administration. That is to say that establishing such a tax for the bloc is not going to be easy; not least because the EU will need to avoid triggering a trade war with the US. But the issue is too pressing to wait. Big companies operating in digital spaces have made profit during the pandemic – Amazon for example doubled its profits during the second quarter of 2020 (Dastin & Rana, 2020). And if the EU wants to mitigate the effects of the shutdowns on their domestic firms and small businesses, it is going to need as many sources of revenue as possible.

flag of U.S.A.
photo by Renan Kamikoga published by Unsplash

References

Dastin, R. & Rana, A. (2020, July 30). Amazon posts biggest profit ever at height of pandemic in U.S. Reuters. Retrieved from: https://de.reuters.com/article/us-amazon-com-results/amazon-posts-biggest-profit-ever-at-height-of-pandemic-in-u-s-idUSKCN24V3HL

European Council. (2020, October 20). Digital Taxation. Retrieved from: https://www.consilium.europa.eu/en/policies/digital-taxation/#

Fleming, S., Brunsden, J., Giles, C. & Politi, J. (2020, June 17). US upends global digital tax plans after pulling out of talks with Europe. The Financial Times. Retrieved from:  https://www.ft.com/content/1ac26225-c5dc-48fa-84bd-b61e1f4a3d94

Heikkilä, M. & Braun, E. (2020, July 23). Digital Tax: A cautionary tale. Politico. Retrieved from: https://www.politico.eu/article/digital-tax-a-cautionary-tale-france-germany-amazon-google-facebook-platforms/

Horowitz, J. (2020, November 25). France orders Big Tech to pay despite threat of US tariffs. CNN. Retrieved from: https://edition.cnn.com/2020/11/25/tech/france-digital-taxes/index.html

Reuters. (2020, November 30). Biden should clarify US position on digital tax within two months, France says. Reuters. Retrieved from: https://www.reuters.com/article/eu-usa-tax-idCAKBN28A18P