Calls for digital tax on tech giants meets scrutiny

As the “digital republic” of Estonia wraps up its EU presidency this year, as European lawmakers have set their sight on tech giants in an effort to push them to be more open about their corporate earnings and tax payments. Earlier this month, Tallinn oversaw a major step forward on one of its key agenda items, as EU decision-makers agreed on ways to force Google, Apple, Facebook, Amazon and other big tech firms to pay more national taxes, in the midst of complaints that they have been avoiding paying their fair share despite earning billions of euros in profits each year.

In a meeting in Brussels this month, European finance ministers asked the commission to consider imposing stopgap measures, such as an equalization tax on digital revenues, until they can agree on a global response to the issue. France has been openly calling for such a tax, which is intended to level up the total tax they pay on their earnings compared with other kinds of firms. According to French Finance Minister Bruno Le Maire, “The objective is taxation of digital giants within two years.”

The move was a win for Tallinn as it concludes its turn as president of the EU Council. “With the growth of the digital economy, we need to rethink our tax rules,” said Estonian Finance Minister Toomas Toniste at the ECOFIN meeting. “We need to take international taxation rules into the digital age to ensure fair taxation for both digital and nondigital companies. The EU is today taking a leading role in this.” Indeed, the tiny Baltic state placed digital governance at the heart of its agenda for its six-month stint, prioritizing progression on taxation of the digital economy and free movement of data, development of 5G networks, and agreement on an e-commerce VAT package.

But not everyone is happy about the new rules, with countries divided on whether the issue of how to tax multinational tech firms should be grappled with at a more global level to avoid giving the EU a competitive disadvantage. The split shows there are likely to be major battles ahead as Brussels aims to achieve a more comprehensive proposal for taxing digital giants in the spring.

Indeed, a number of EU countries, including Ireland, Malta, Sweden, Luxembourg, and the UK, have protested that a unilateral move on corporate tax reforms would harm the economy and consumers and push tech firms to set up shop elsewhere.

Ireland, for one – the home of the overseas headquarters of numerous major tech firms like Apple – is deeply opposed to the plans, which officials fear could undermine the domestic corporate tax regime, harm its appeal as a base for multinationals, and lead to uncertainty and double taxation. According to the Economic and Social Research Institute, the move could cost Ireland €4 billion lost tax revenue every year. The government is among those that has instead been pushing for stronger global coordination under the aegis of the Organization for Economic Cooperation and Development (OECD), which plans to publish a report next year about ways to reform digital taxation worldwide. It has also cited concerns about a possible backlash from Washington, which has already censured previous plans to force Google and other taxes pay higher taxes in Europe.

An EU-wide digital tax regime could also have serious repercussions in Malta, another EU member state that, like Ireland, has benefited hugely from the tech economy due to its progressive regulatory regime, and low corporate tax rates. The small island has notably emerged as a hub for numerous international land-based and online betting operators. In Malta, the online gaming sector represented 12% of the national economy, contributing €1.2 billion to GDP and employing more than 6,000 people in 2015 – no small matter in a country with a population of only half a million.

Valletta, through the aegis of the Malta Gaming Authority, is in the midst of setting the golden standard on consumer protection rules when it comes to players that are at risk of gambling addiction. Measures such as offering self-exclusion databases, as well as a dedicated player support unit show just how serious the small island is about making sure the industry thrives. In this context, Maltese officials fear that an overarching, EU-wide tax regime could stymie this sector, which grew 10.4% in the first half of 2017 compared with the same period last year.

Several Nordic and Baltic states, notably Sweden, have also raised questions about the plan. During a discussion of the proposed “equalization” turnover tax on tech giants earlier this year, Swedish Finance Minister Magdalena Andersson called the proposal a “strange bird” in the global tax system, saying that this would translate to a de facto shift of taxation to the consumer market. Indeed, for export economies like Sweden, which have relatively low populations with numerous large companies, such a tax is not in their interest.

Digitally-savvy Estonia, for its part, has proposed its own set of rules, pushing for the concept of a “virtual” permanent establishment approach to taxing tech firms so that they could be taxed where they create value. Yet this, too, has its flaws, leaving unanswered the question of how it would impact individual member states’ tech economies.

With no agreement in sight, the standoff is likely to escalate into the new year, as France eagerly tries to push through new tax reforms and those that have benefited most from the tech economy, like Ireland and Malta, express opposition. Yet if Europe wants its economies and consumers to remain competitive with outside markets and reap the maximum benefits possible from the digital economy, it would be wise to proceed with caution.