The EU has long considered levying a tax of between two and six percent on the local revenues of platform giants. The prospect of trade talks with the US has brought this topic back into the spotlight. However, an EU-wide digital tax would limit potential future innovation.
As it stands right now, the European Commission is considering three options for a digital services tax. One would consist in a corporate income tax top-up on all companies with digital activities in the European Union, the other a tax on revenues from certain digital activities in the EU. A last option would be a tax on business-to-business digital transactions in the EU. The reasoning in favour of a DST (digital services tax) are two-fold: on one hand, and stemming from French political pressure, the DST is considered to be socially fair. Digital companies prefer tax-optimised HQ locations, which means that those nations with larger corporate tax levies lose out on revenue from digital transactions. This would be changed through a tax that does not consider the location of the firm, but the location of the transaction. On the other hand, the EU has just created the largest budget in the history of the union, and has taken up a loan of €750 billion. It isn’t entirely clear how this money will be paid back until 2058, but a digital tax seems to be among the existing proposals.
A DST is rejectable for many reasons. We don’t know at this point how such a tax would make market actors react. When GDPR was introduced, we saw a large amount of media operators seize their activities in the EU, because they were unsure how to deal with new privacy rules. This goes beyond a rule, and will affect the balance sheets of companies. Adding to that, the thresholds are very important. Low tax thresholds would affect small European start-ups, which could then also revert to only offering their services in low-tax countries.
Innovators should be able to choose between high-taxed and low-taxed locations, not be faced with a uniform unavoidable tax. Complicated issues – such as the EU’s digital lag – require complex solutions according to officials, but that’s not the case. Less intervention means more innovation. Antitrust lawsuits — a direction the EU has been more keen to take in the past years — are a great tool for tax collecting but they don’t solve the core problem. We need a digital market that has many different options to choose from, making it less likely that one company can gain a monopoly as it will be more preoccupied with actual competition, and thus seek to come up with innovative solutions for consumers.
The central justification given by the Commission for both proposals is that digital activities are not subject to traditional taxation. The intellectual property of the companies concerned is often located outside the EU, where most of the added value is created. The income of these companies is generally not taxed in the EU, but this certainly does not mean that the firms aren’t taxed at all, especially since the US has adopted a global minimum tax. It is therefore not the virtuous ideal that “these companies must pay their taxes”, but rather that these companies must pay their taxes to the EU. The difference for an international organisation that has just lost a major contributing member (the United Kingdom) is therefore more a question of revenue than a principle of social justice.
This bargaining tactic could drive up one bill, and that is the one of the European consumer. Very often, increases in company expenditure in indirect taxes, which this would inevitably imply, would raise prices for consumers around the continent. VAT has long been recognised as the tax which hits poor people the hardest, yet many EU countries now prefer to introduce higher levels of indirect taxation. Just at a time when especially low-income earners can have simpler access to many products because of the internet, it seems cruel to restrict their purchasing power, particularly in the midst of a pandemic that sees many EU citizens compelled to use digital solutions. If we care about those with low wages, we need a more competitive marketplace in which companies are in a price race, not a race to optimise astronomical tax burdens.
The future of Europe’s market economy undeniably lies in the digital sector. The idea of attempting to massively tax online businesses is not a promising objective, neither for the states nor their consumers. It belongs in the dustbin of creative political EU integration.
This article was first published by The Conservative.
Thanks for liking and sharing!