Europe needs corporate tax reform. The digital turnover tax is not it.

March 22, 2018

Paul MacDonnell, Executive Director, Global Digital Foundation

Europe’s tax laws haven’t kept up with the digital economy. As in most other places, its bricks and mortar businesses are taxed on how much and, crucially, where they get paid. On the other hand a movie streaming service in one country will pay tax there but not to the governments of its foreign customers. Hence the European Commission believes that digital businesses are different. But as well as proposing a hard-to-criticise measure that will limit their intra-EU tax minimisation strategies it is also proposing a special digital turnover tax that will punish productivity, penalise European consumers, and slow Europe’s progress towards the Digital Single Market.

Europe’s finance ministers are worried that the growing digital economy—online sales in Europe rose from 13% of all sales in 2008 to 20% in 2016—and EU Members’ own varying tax regimes are destabilising their tax base. In 2016 the Commission brought forward a proposal for a Corporate Consolidated Corporate Tax Base (CCCTB) to meet this challenge that is sensible if not visionary. Its underlying logic is that multinational businesses should remit tax collected on profits to countries whose citizens, legal systems, and infrastructure, contributed to them. The CCCTB proposal aims to simplify Europe’s corporate taxation system and will be an important contribution to building the European Single Market.

But the Commission believes that digital businesses are more different than that. It has published two proposals that treat them as special. The first is to fast-track a CCCTB-type regime for them to pay corporate tax in Member States where they make profits. Assuming this avoids double taxation—paying tax on the same profits in more than one country—and destabilising disparities with non-EU tax regimes it is hard to argue with this idea. There is no reason why, being first in everything else, large digital businesses should not also be first in implementing this kind of reform. It may also be in their interests to do so. By normalising their fiscal relationship with the EU as a whole it could help improve their often-fraught relationship with Europe’s policymakers.

Or at least it would do if it weren’t for the second proposal. As well as being concerned about where products and services are sold the Commission is taking an interest in where and how the users of digital platforms such as Facebook, eBay, and Youtube contribute to these companies’ creation of value. It proposes an “interim” 3% tax on digital businesses’ revenues based on what it sees as their reliance on "intangible assets" to make profits.

The 3% tax would partly implement a wider set of proposals that the Commission announced last September to tax four digital platform “models”: "online retailer", such as Amazon and eBay; "social media", such as Facebook and Twitter; “subscription”, such as Spotify and Netflix; and “collaborative platform” such as Airbnb and Blablacar. The Commission observed that “businesses of all kinds now derive much of their value from intangible assets, information and data”. It further pointed out that it is difficult to identify where this value is created. “There is no single defining feature of new ways of doing business in the digital space” it said.

The Commission’s argument for special measures for platforms reflects an emerging European doctrine that identifies digital platforms’ interactions with non-paying users, including the provision of free services, as transactions with a financial value. This is the view of the German Cartel Office in its assessment that Facebook is abusing its “dominance” of the “German market for social networks” by breaking the country’s data protection law—a contravention over which the Cartel Office has no jurisdiction and for which it has adduced no evidence.

The trouble with trying to define how value is derived from “intangible assets, information and data” is that innovative technology and the organisational models it supports doesn’t just do things better. It finds whole new paths to human goals. Trying to identify where the value is created in any business or economic model based on innovative technology is a parlour game. Where, for example, is the value created in Europe’s system of electricity interconnectors if electricity from a power plant in France cooks an egg in Germany which is sold to a sandwich shop in Austria? And don’t our existing, eminently practical, taxation systems cope very well with such “intangibility” by taxing sales and profits? Invoking digital platforms as a source of occult value is not really, as the Commission asserts, about finding a temporary fix while Europe’s Member States figure out how to prevent tax arbitrage. It’s about a broader European claim that seeks to reify aspects of the digital economy outside of profit and pricing so that policymakers can pin it down. But by stating that its proposals are “in response to high political pressure”, the Commission is opting for an unnecessary political solution that looks high-handed. Its approach seems based on both the populist idea that digital platforms do not “pay their fair share of taxes” and anxiety about digital technology’s disruptive power. It is a poor basis for public policy.

Europe’s own taxation system surely needs the kind of rationalisation and reform that the Commission is aiming at with its CCCTB proposal. But an “interim” tax on digital platforms would be an extraordinary departure from a globally-coordinated corporate tax system that protects risk taking, innovation, and investment by taxing profits, not turnover. Often by their very nature digital innovators make small profits or even losses. Spotify is losing substantial amounts of money as it seeks to scale its business. Much of the benefit of low profit margins or, even, losses is passed onto consumers.

The idea of taxes based on interactions that use assets of “intangible” value aims squarely at penalising Europe’s consumers for the benefits they have gained from digital platforms. These include: free software, a choice of music, video, and copyright-free literature unavailable to even the wealthiest people just a few decades ago, and vast improvements and savings in travel, shopping, finance, and communications. The Commission rightly identifies users' contribution to the value of digital platforms. But users claim the lion's share of this value in the form of lower transaction costs, more easily found jobs, and improved access to culture. The value is not intangible. It is just unmeasured. What is not in doubt is that it belongs to users.

The Commission has already identified a number of useful ways forward that take into account where business is being transacted. But taxing the turnover of digital platforms would harm Europe’s citizens and European productivity.

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This article has also been published on euobserver.com 

Views expressed in this article are those of the author and not those of the Global Digital Foundation which does not hold corporate views.