As long as the European Union does not adapt the outdated international corporate tax rules – which date back to the time of brick-and-mortar industries – to the era of the digital economy, the EU-countries keep on losing valuable tax revenues. Paul Tang, member of the Committee on Economic and Monetary Affairs in the European Parliament, answers the questions of #ProgressiveEurope about the taxation of the digital giants.
On 15-16 September, the EU ministers of economic and financial affairs gathered in Estonia to discuss, among other things, the challenges of taxing the digital economy. What are the distinctive features of these multinational companies? What is their current situation regarding tax legislation? What are the consequences for the different European member states?
The main distinctive feature of the digital economy is that services are provided digitally with minimal physical presence. The current international corporate tax rules only create a tax base for a Member State when the business has a physical presence. Therefore, activities of digital platforms remain untaxed in most Member States whereas the business is digitally present and creates value. As a consequence, these Member States very likely miss out billions of euros of tax revenues from digital platforms like Google and Facebook. In my recent study, we estimate the loss between 2013 and 2015 from these two digital giants only at more than 5 billion euro. As long as we do not adapt the outdated international corporate tax rules – which date back to the time of brick-and-mortar industries – to the era of the digital economy, the EU-countries keep on losing valuable tax revenues.
On the initiative of France, several ministers of economic and financial affairs supported a turnover tax for digital giants. EU representatives rather bring up a tax on the companies’ digital presence – measured through the exploitation of personal data for example – in relation to the Common Consolidated Corporate Tax Base (CCCTB). Other experts consider the idea of a diverted profit tax based on the “Google tax” model, which was implemented in the United Kingdom in order to incite companies to pay the corporation tax. What are the advantages and drawbacks of these different measures? As a member of the European Parliament, what is your position on this issue?
Let me begin to say that I applaud the current efforts undertaken by Member States on this issue. It puts the topic on the top of the agenda of the Council, and that is exactly what you want with a file that requires unanimity. The next question would be then: how do we effectively tackle this problem? As one of the EP-rapporteurs on the CCCTB-proposals, I have been working on measures to address the tax challenges of the digital economy. Our proposal is to include digital presence into the tax rules that creates a taxing right for Member States, so called ‘permanent establishment’. This makes digital giants subject to corporate tax in countries where they have no physical presence. Moreover, the proposal by the European Parliament is to apply to digital companies first, because we acknowledge that this is the most urgent issue. The initiative of France and other supporting countries takes a different starting point and proposes to tax the revenue of a company instead of its profits. This is, as France has also underlined, a quick fix approach, because it can theoretically be implemented within the current tax system. In my opinion however, any efforts to address taxing loopholes for digital companies have to take place in the context of a broader European tax reform. This reform is long overdue and leads to unhealthy tax competition between Member States and aggressive tax planning strategies by companies.
Which obstacles – both on a European and an international scale – have been slowing down the implementation of tax mechanisms for the digital economy within the EU?
At the international level, the OECD has declared the tax challenges of the digital economy as ´Action 1´ of the BEPS-package (Base Erosion and Profit Shifting) for reform of the international corporate tax system, and not without a reason. However, when it comes down to taxing the digital economy, the U.S. have a strong vested interests with regard to ´their´ digital giants. This was one of the reasons the OECD did not draw a final conclusion, but has set up a task force instead, postponing the issue for 5 more years. At the EU level on the contrary, the issue is widely recognized. The way to address the issue remains an obstacle, not in the least because any decision on taxation requires unanimity among Member States. On the other hand, I want to reiterate that I am glad that the issue is finally on the agenda. A year ago, when the Commission tabled its CCCTP-proposal, the digital economy was not even included. Now the Commission, the Parliament and the Council have all identified the issue as a priority. This is a window for progress, and we will work hard to seize this opportunity.
Paul Tang has been a Member of the European Parliament for the Netherlands since 2014. There, he is a member of the Committee on Economic and Monetary Affairs.