Blog: The Right Rate for the proposed EU Digital Tax


Written by Alan Rhode (Taxmen)

When, last March, the   European Commission   took the   unprecedented step    of proposing a   short-term transaction tax   on   certain digital services   such as targeted advertising and intermediate services, for instance as those supplied by   Uber   and   Airbnb   and the sale of data, it chose the   rate   of   3 percent   for the whole package.

The Commission’s architects reasoned that anything below 3 percent would not cover   administrative   and   enforcement costs   of the transaction tax known as the   Digital Services Tax. It also reasoned that anything above 3 percent would prove   punitive   to the point it would   curtail   the   growth   for companies and the   digital economy   as a whole.

Based on the European Commission estimates, the   overall revenue   generated by a 3 percent tax on eligible digital companies (those with at least a 750 million euro yearly turnover globally and 50 million euro yearly turnover in EU sales) would amount to some   6 billion euro s a y ear.

But now that EU member state tax experts from the member states have   dissected   the proposal as part of the Council of Economic and Finance Minister negotiations, the 3 percent rate is second only to the overall scope of the plan when it comes to   surmounting divisions   in order to reach an agreement.

There are   disputes   that the   rate   is either   too low   or   too high.

As EU finance ministers – under the direction of the EU rotating presidency holder   Austria   -push for an agreement by the end of 2018, some EU member states, led by   France, which insist the 3 percent is too low, want it to be a   minimum rate   that would give EU member states the   freedom   to   impose   an   even higher   levy.

But other member states rejoice that a flat 3 percent rate is too high for some companies, for it does overlook the   different   profit   margins   of digital businesses. This problem is related to the fact that the DST is constructed as an   indirect tax   and, therefore, it is   impossible   to design a concept of   deductible expenses   similar to those used in for direct or corporate taxation.

The option of   turning   the tax into a   direct tax   would, according to EU tax experts, run into   legal problems   because of conflicts with double tax treaties.

Therefore, some EU member states are insisting on a   menu   of   tax rates   based on the profit margins of the concerned business models (targeted advertising,   intermediate services  or the   sale of data   collected about users and generated from user activities on digital interfaces).

However, the   multiple rate approach   is further complicated, according to some EU countries, because of concerns that the proposed turnover and sales thresholds will   distort competition. This issue is referred to as the “cliff edge” problem, because a company with digital revenues of 51 million euros would be subject to the tax while a competitor with 49 million euros in revenues would be exempt. In order to overcome the cliff edge, some EU member states are pushing for a   tax allowance that would exempt the first 50 million euro for eligible companies.

 But if the allowance were agreed, it would raise a   conundrum: if accommodations are made to compensate for the cliff edge approach and different rates are set for different services in order to accommodate different profit margins, the   only way to generate enough revenue to make the tax worth applying is to apply a rate higher than 3 percent. And, as the European Commission determined in its economic impact assessment, that would be  counterproductive.

Of course, these kinds of technical difficulties are a few examples of why   OECD negotiations   on digital taxation as part of the BEPS process are still a work-in-progress. Will an EU, which is divided by countries desperate to impose the DST versus those insisting that an OECD solution must be first agreed, be able to   sort out   the rate-related problems?

This is a guest article   written   by   Ecommerce   Europe VAT & Taxation Expert Alan Rhode, who is the founder of Taxmen.   Taxmen   is a   company specialized  in tax and legal services for the e-commerce sector. Taxmen   cooperates with Ecommerce Europe for all VAT and taxation-related matters.