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EU's Proposed Digital Tax on Technology Giants Google, Apple, Facebook and Amazon on Radar

Professor of Financial Economics and Part-time Value Investor, Transfin.
Nov 14, 2018 6:53 AM 3 min read

European Union’s (EU) proposed ‘Digital Tax’, also dubbed ‘GAFA tax’ after Google Apple, Facebook and Amazon, has caught its members in a transatlantic tension.


Even as top leaders from the constituent countries recently came together to deliberate upon the tax levy, the policy endpoint seems distant still.


What is Digital Tax all about? What is the proposition and the criticism around it?


Top leaders from EU recently met to deliberate upon the proposed tax levy on profits made by Tech companies such as Google, Apple, Facebook, and Amazon through digital activities undertaken in Member States, such as selling user-generated data and content.


Zooming out: EU issued 2 tax proposals in March this year.


Proposal 1: A comprehensive reform of corporate tax rules specifically for digital activities.


Once in place, this reform will allow Members to tax profits made by digital companies within their territory regardless of their operational presence. The idea then is to create a level-playing field for bricks-and-mortar companies that pay more tax.


According to the proposal, a digital platform will be deemed to have a taxable 'digital presence' in a Member State if it fulfils one of the following criteria:


  • Exceeds a threshold of €7 million in annual revenues in a Member State
  • Has more than 100,000 users in a Member State in a taxable year
  • If over 3,000 business contracts for digital services are created between the company and business users in a taxable year


Proposal 2: An interim tax of 3% to be applied on revenues from digital activities currently not captured by the tax rules, until comprehensive reform (Proposal 1) is implemented.  


This will apply as an interim measure, until the comprehensive reform has been implemented, and after alleviating any possibility of double taxation. It will be applicable to revenues created from activities where users play a major role in value creation, such as those revenues:


  • Earned from selling online advertising space
  • Earned from digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them
  • Earned from the sale of data generated from user-provided information.


These tax rules will only apply to companies with total annual worldwide revenues of more than €750 ($920m) million and EU revenues of more than €50 million.


These riders will ensure smaller start-ups and scale-up businesses remain unburdened. Implementation of the interim tax is estimated to generate revenue of €5 billion a year for Member States if applied at the rate of 3%.


UK, despite of Brexit has also announced a similar 2% levy to be applied on digital sales revenues from April 2020 onwards. 


While France and Germany are pushing in favour of Digital Tax, low tax jurisdictions like Ireland; and Nordic states are against the move.


Now while some states like France and Germany are zealously pushing towards the implementation of these proposals, others like Ireland and the Nordic states have voiced their dissent.


Expressing his opposition, Finland's Finance Minister Petteri Orpo noted that "the costs of administering the Digital Tax will be higher than the revenue," when considering the immense complexities of implementation.


Ireland, where many US tech companies have setup their European headquarters due to its low taxation regime, feel its competitive advantage within the EU would be lost with the implementation of the Digital Tax.


Violation of existing bilateral tax treaties within the EU and risk of possible retaliation from the US have also been cited as drivers.


With Tech companies currently being under-taxed thanks to cross border discrepancies between their operational and commercial footprints, Digital Tax is necessary. But a fruitful endpoint can only be achieved by striking some sense of balance.


With trade and businesses increasingly going digital, it becomes imperative to put in place a framework which would regulate these. The only way the ongoing debate would reach a fruitful endpoint if the proposed tax regime is not one which would impede innovation at the cost of boosting revenues for its members.


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