EU digital turnover tax a VAT in disguise?
- 9 September 2017 | Jason Moore
European Union finance minister will this week review a proposal to tax US digital groups’ revenues based on location of their consumers. However, such a turnover tax may transgress EU VAT rules and international treaties.
UPDATED 17 Sept: 10 EU member states have signed up their commitment to proceed with negotiations around the proposed tax. Estonia has added a plan around abandoning 'the requirement that companies have to be physically present in a country' to be taxed.
Taxing tech giants
The proposed ‘Equalisation Tax’ is aimed at disrupting the lawful corporate structures of companies such as Google, Apple, Facebook and Amazon (dubbed ‘Les Gafa’), which are taxed on net profits. Through a mixture of legitimate EU cross-border holdings, investment write-offs and non-resident trading, these companies have paid minimal profits on large revenues. Many of the EU headquarters and selling entities of the firms are located in low tax EU jurisdictions for this reason.
The Equalisation Tax initiative has been launched by France and is backed by Germany, Italy and Spain. The suggested tax rate on turnover is between 2% and 5%.
The proposal would seek to establish virtual Permanent Establishments subject to the tax in all EU states where companies are selling goods. Currently, companies selling in the EU are free to sell goods or services in other member states and pay no local corporation tax if they have no operations (permanent establishment) in the customer’s country. The sale is subject to local VAT.
A VAT in disguise?
Under the EU VAT Directive rules, states are prohibited from imposing VAT-like turnover taxes.
Will this proposed tax qualify as a turnover tax? Unlikely. The measure would be a tax on the companies, rather than the final consumer. And, there is no provision for the deduction on input costs. Both of these features could mean the tax would not be considered in conflict with VAT. The tax would therefore be considered a corporate income tax-type of regime.
Global rules may block Equalisation Tax
Whilst the Equalisation Tax may circumvent the VAT restrictions, there are other barriers to the proposition. EU Treaties require unanimous approval for tax measures, and countries with significant US tech investment – such as Ireland and Luxembourg – would probably block the measure. Global tax bi-lateral treaties would also need amended to prevent a loss of EU competitiveness.
Since at least 10 member states now have agreed to continue discussions, the EU's 'Enhanced Procedures' mechanism could be used to enable it to proceed in co-operation with the European Commission. This route has already been followed with the still draft Financial Transaction Tax.