At the EU’s Economic and Financial Affairs Council (ECOFIN) meeting on December 4, countries expressed reservations about France and Germany’s last-minute proposal for a watered-down tax on digital business activity.
Business sources told ITR that the chances of the EU adopting any kind of digital tax have expired.
Brian Farrell, senior director of global tax at job-search website Indeed, told International Tax Review: “The ball is back in the OECD court.”Farrell indicated that businesses’ concerns would now shift to potential DST measures among individual member states.
“The other unknown is whether we will see unilateral action by some of the countries now”, he said.
Richard Asquith, VP for global indirect tax at Avalara, told ITR that there are likely to be more unilateral DSTs as a result of the EU proposals failing. “In particular, France and Germany are likely to launch a synchronised tax proposal, largely mirroring the moribund EU version. They may also attempt to bring others in, including Italy, and gather enough support for the EU’s ‘enhanced cooperation’ mechanism [which requires only nine member states to agree] to be deployed.”
The only surprise, another industry source said, was that anyone had ever taken the idea seriously, given the opposition of some Nordic states and Ireland to any proposal that pre-empts a global solution. EU member states must agree unanimously on tax changes.
The French–German compromise proposal, which would levy a 3% tax on online advertising revenue, would probably raise less than half the revenue of the original proposed DST, according to a French diplomat’s estimate. At the December 4 meeting, the proposal met with opposition both from member states who saw it as too diluted and from some who felt it still went too far in pre-empting OECD agreement on digital taxation.
Most staunch among the latter group was Paschal Donohue, Ireland’s finance minister, who told the meeting: “I continue to have strong, principled concerns about this policy direction.”
Business leaders signalled their satisfaction that the EU’s efforts had stalled.
James Watson, director of BusinessEurope, a major industry group, said that his members had been concerned about both the DST and the advertising tax proposals because they would be taxes on revenue rather than profits. “It is clear that a number of member states have recognised the dangers of the EU pursuing a digital tax which would break international convention by taxing revenue not profits,” he told ITR.
He added: “The evidence base regarding the idea that companies with digital tax models are not paying the same as non-digital models doesn’t seem convincing. So we have suggested that the EU go back and look carefully at the issue to determine in more detailed terms whether there really is an issue in terms of that issue.”
Italy and Spain DST plans face difficulties
Yet even in the member states that have already signalled a commitment to a DST there are obstacles.
Spain’s parliament has not yet approved its proposed DST. The opposition People’s Party, which holds a majority in the upper house, has signalled it will oppose the legislation, even though it had first proposed the idea of the tax when it was in government earlier this year.
The proposal has faced opposition in the business community. Adigital, a Spanish digital business body, outlined its opposition to the law earlier this year on the basis that “temporary fiscal measures adopted in the past have proven to be highly distorting, generating a strong legal uncertainty for citizens, companies and investors, and forgetting their provisional nature to become permanent.”
Italy’s passed its digital services tax, which will theoretically come into force on January 1 2019, as part of the 2018 budget. However, it can only take effect pending instructions from the finance ministry, and none have so far been issued. As a result, said Giammarco Cottani, a partner at Ludovici Piccone, “The situation is rather foggy.”
“I don’t think that this is something that will come so smoothly as most people think,” he said of the proposed January 1 implementation date.
The head of transfer pricing at another Italian law firm told ITR he feels the Italian tax only exists to put pressure on the EU, and will not ultimately go through as a unilateral measure.
Cottani drew a distinction between how Italian and multinational companies were preparing for the tax. “The approach that I have seen so far by Italian companies is mostly wait-and-see. Non-Italian groups with interests in Italy … are already starting to think what can be done in order to mitigate their risk profile.”
“Family-owned Italian groups are focused on running the business.” Adapting to the law can wait.
In any event, Italy’s proposed law is much narrower in scope than the Spanish and British proposals. “It applies only for the supply of services to Italian residents and excludes the e-commerce sector”, explained Angela Cordasco of Loconte & Partners in Milan.
On December 7, Bruno Le Maire, France's finance minister, announced that France will enact its own digital tax in 2019 if no EU agreement is reached by March.
Image: Yann Caradec (CC BY-SA 2.0)
