EU to get tougher on Internet giants

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According to plans by the EU Commission, the European Union will introduce a joint tax for taxing the profits of Google, Apple and other Internet companies. How exactly this should be implemented remains unclear for the time being.

Internet companies are generating gigantic profits, partly because they pay little or no taxes in many countries. The average tax burden on digital companies is merely around 9 percent – less than half of what companies with traditional business models have to pay, as the Commission points out.

To change this, the Commission is proposing a concerted taxation plan of all member states. “We need a communal and coherent approach”, comments Commission Vice President Valdis Dombrovskis. Some countries, however, have already taken their own initiatives, in order to reduce the loss of tax income – an approach criticised by the Commission as chaotic: “If the unilateral actions don’t stop, chaos will reign on the single market”, comments one Commission senor official.

The problem, however, apart from a lack of unity in the matter, is the technical problem of physical borders. Companies are taxed in their country of residence, a reality widely exploited by large multinationals, which set up their headquarters in low-tax countries and thus manage to avoid higher taxes, all while operating and generating income in higher-tax level countries all the same.

In order to tackle the tax injustice and narrow the tax gap between ordinary companies and the digital giants, the EU is proposing three quick fixes:

  1. Taxation of income instead of profits for digital companies
  2. A source tax on payments made by e-commerce customers in any given EU country
  3. A tax on income from services or advertising, from which a company headquartered abroad receives a “significant share”

It is not clear yet which solution is preferred by the Commission. All three options however promise to be more rapidly deployable than the preferred solution of the Commission, which is a joint corporate tax base across the whole EU, leading to equal taxation of companies in all EU countries.

Why the three “quick fixes” could be more easily implemented remains somewhat unclear. The resistance to such changes in EU taxation of countries like Luxembourg and Ireland, who have made it their business model to attract multinationals with major tax breaks, is likely to remain the same. After all, these decisions would have to be taken with unanimity.

Juncker’s proposal

In the face of the billions of tax euros which are at stake, Commission President Jean-Claude Juncker recently suggested to change the decision-making rules in the council finance ministers to allow qualified majorities, so that small tax haven countries would lose their veto rights.

While EU parliament repeatedly echoed these demands, the Commission remains careful and warned not to mix the issue of taxing the digital economy with the question of the unanimity principle. After all, even the abolition of unanimous decisions would require a unanimous vote.

The Commission’s outlook is accordingly low-key and there is but timid hope for positive impulses on the matter during the Digital Summit in Tallinn on the 29th of September – even an official declaration of all member states giving importance to the matter would be a first success.

 

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