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15th Dec 2019

EU takes time to ponder tech giant tax

  • How to make sure that digital economic activity is taxed where they are taking place? The commission lists some options, but gives no preference (Photo: rawpixel.com)

The European Commission has published a paper about the question of how to tax the digital economy on Thursday (21 September) - but fell short of proposing legislation.

"What we observe is that digitalisation of economy offers new possibilities to easily shift profit around," said the EU commissioner for the euro, Valdis Dombrovskis, at a press conference in Brussels.

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  • Dombrovskis: 'What we observe is that digitalisation of economy offers new possibilities to easily shift profit around' (Photo: European Parliament)

"Member states are losing tax revenues," he said.

The paper comes amid a wider debate about how global internet companies, like Google and Facebook, should be taxed. It said that the effective average tax rate in the EU of companies with a digital domestic business model was 8.5 percent. By comparison, the effective average tax rate of companies with a traditional domestic business model was 20.9 percent.

Earlier this month, the finance ministers of the four largest eurozone countries - Germany, France, Italy, and Spain - asked the commission to design an "equalisation tax" on turnover, instead of on profit.

The idea is that companies, like Google, could that way be forced to pay tax where they make money, instead of where they are registered.

Thursday's paper mentioned equalisation tax, but only as one of several "short-term options", adding that "further work is needed" before a legislative proposal can be finished.

"This is a roadmap for further action - it is not the final product," said an EU official after the press conference, explaining the paper to journalists on the condition of anonymity.

"We are looking at a very complex issue," he said, giving as an example that there is no common definition of what constitutes a digital company.

"Companies are digitalised to a greater or lesser extent," the source said. He also noted that there are "various business models" that are affected, but that there is not a single solution.

"If it were that simple, that we could draw a magic solution out of the pocket, it would have been done it by now," he said.

The commission's paper stressed that "the ideal approach would be to find multilateral, international solutions to taxing the digital economy".

In that context, Dombrovskis noted that EU member states should have a common position, so that the EU "speaks with one voice".

The issue is being discussed at the level of the Organisation for Economic Co-operation and Development (OECD), in which the commission takes part. Most, but not all, EU members are also OECD members.

Early next year, the OECD will present an interim report on the taxation of the digital economy. But if that report does not provide sufficient progress, the EU should adopt its own rules, the commission said.

The EU should "focus on EU solutions if progress at international level proves too slow", the paper stated.

The commission is keeping the option open of coming with legislative proposals in the spring of next year.

One additional challenge is that EU rules on tax must be agreed to by all member states unanimously.

French finance minister Bruno Le Maire said on Thursday, responding to the publication of the paper, that he "welcomed" it and that the document provided "a useful framework for future discussions".

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