European finance ministers call for revenue based tax for digital giants

Four European finance ministers have launched a move to introduce an ‘equalisation tax’ on digital multinationals like Google and Amazon, which would see them taxed on revenues rather than profits, a proposal which CIOT says risks undermining years of work on convergence in global tax systems

The suggestion is contained in a letter to the European Commission by the finance ministers of France, Germany, Spain and Italy, led by French finance minister Bruno Le Maire.

The letter argues that hi-tech giants are paying too little tax in the countries in which they operate, because revenues are booked via other, lower tax, jurisdictions.

It states the four countries will ‘no longer accept that these companies do business in Europe while paying minimal amounts of tax to our treasuries’.  It calls for a tax be set at around 2% to 5% of turnover ‘to reflect some of what these companies should be paying in terms of corporate tax.’

The aim of this ‘equalisation tax’ on turnover would be to bring taxation to the level of corporate tax in the country where the revenue was earned. 

The four signatories to the letter indicated they intend to bring the topic up for discussion at the informal meeting of economic and financial affairs ministers (ECOFIN) to be held in Tallinn at the end of this week.

This meeting has ‘corporate taxation challenges of the digital economy’ as one of its themes.

John Cullinane, CIOT’s tax policy director, pointed out that Le Maire’s proposals run counter to the main principle of international taxation, whereby tax is levied where value is generated and not where the goods or services are sold.

‘While it may well be that the US companies targeted in the letter typically pay substantially less than the US headline rate of approximately 40%, this is largely because of imperfections in the US tax system. President Trump and Congress have signalled they do intend to tackle this,’ he said.

Cullinane pointed out that the ‘equalisation tax’ would represent a move away from currently agreed international principles, which have been recently updated through the G20 led and OECD administered base erosion and profit shifting (BEPS) project. Introducing unilateral tax raising measures outside these international principles could result retaliation by other countries and effective double tax burdens on companies that could ultimately harm cross border trade.

‘A practical challenge for advocates of corporation tax change is to define an “internet giant”. The OECD decided that you could not tax the digital economy on a different basis to the non-digital as there is no clear boundary. Could you really impose a turnover tax on Airbnb but not on hotel chains' online sales? On e-books sold on Amazon, but not paper books sold on-line direct from a publisher,’ he said.

On a broader level Cullinane argued that such a tax would cast doubt on ‘decades of painstaking convergence in global tax systems’.

‘Would its introduction signal that it has been concluded the current system does not work and cannot be reformed to work? If this is the case, then it needs more than four countries or even the whole of the EU to be involved; the whole world needs to start designing a new way of taxing companies operating across borders,’ he said.

In their letter, the finance ministers counter this point, stating: ‘This proposal is practical. It does not call into question the essential work on a common corporate tax base (CCTB) and the common consolidated corporate tax base (CCCTB. The Commission could decide to propose a legislative initiative accordingly. It will demonstrate our commitment to appropriately tax the companies of the digital economy in a way that reflects their genuine activity in the EU.'

Report by Pat Sweet

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