The “Fair Taxation of the Digital Economy Directive” is a blatant attempt by the European Union to tax large American tech companies and to reduce tax competition among EU countries. Here’s how the European Commission justifies their new tax:
Today’s international corporate tax rules are not fit for the realities of the modern global economy and do not capture business models that can make profit from digital services in a country without being physically present.
Current tax rules also fail to recognise (sic) the new ways in which profits are created in the digital world, in particular the role that users play in generating value for digital companies.
The EC Directive, created by French leaders and announced last month, proposes that each EU member state impose a 3% tax on revenue from online advertising and marketplace sales to EU residents. The tax might as well have been called the “American tech tax”, since most of the 150 companies captured are based in the US.
The new tax applies to online businesses with global revenues above €750 million and EU revenues of at least €50 million. It then goes on to exempt the entertainment industry.
To impose their new tax on foreign businesses, the EU abandons the physical presence standard of taxation, and instead targets revenue “where businesses have significant interaction with users through digital channels.”
This radical move by the EU to ditch the physical presence standard for online businesses mirrors a similar attempt by several US states to impose sales tax obligations on out-of-state retailers. So, it is critical the US Supreme Court maintains the physical presence standard in the US. (See iAWFUL #1 on the importance of Quill to protect small businesses who use the internet to sell products).
The EU claims that it is “just trying to create a level playing field.” But this new tax is anything but fair or level. Instead of taxing businesses’ profits, which is what they do today for almost every business, the new tax goes into tax-overdrive and taxes the gross revenue of tech companies. This means tech businesses are subjected to an incredibly larger tax basis than their offline corollaries.
The new EU tax is also a sign of frustration by EU bureaucrats that innovative tech businesses are attracted to countries with lower taxes, such as Ireland or Luxembourg, rather than in high-tax countries such as Germany and France.
Fortunately, not everyone is drinking the French wine on taxation. Denmark’s Kristian Jensen worried about this new aggression by the EU, “The Commission and Margrethe Vestager is doing a hell of a job trying to tax Google and other companies that are situated in Europe.”
But we worry that there’s more to taxation of American businesses to come. French Finance Minister, Bruno Le Maire has even said the tax “is only a starting point.” Here’s hoping there are more supporters of rational basis for taxation and fewer for this new European assault on tech.