France and Germany give OTTs early Xmas gift in digital tax saga

Europe ambitious plans to hold the internet giants accountable to fair and reasonable taxation have been temporarily scuppered after resistance from several nations, most notably France and Germany.

While Silicon Valley is still not in the clear, the internet giants will be breathing a deep sigh of relief as their hard-working lobbyists are given another couple of months to influence the plans. France and Germany seem to be the main opponents of the aggressive tax assault, drawing up their own suggestions at the G20 Summit which would allow many of the biggest players to continue to dodge the tax man.

The initial plan was relatively simple; hold the internet players accountable to fair and reasonable conditions by implementing a 3% tax on digital revenues realised in EU member states. This would have placed all the current tax dodgers on the block. The Franco-German joint declaration was supposed to be a compromise, answering the initial opposition, but it seems this watered-down version is not going far enough.

While the Franco-German version of the digital tax certainly is much diluted compared to the initial proposals, it has still been resisted by other players who are protecting their own interests. It seems the ‘all for one and one for all’ theoretical attitude of the European Union does not translate directly into Irish or Norwegian.

“Following a thorough analysis of all technical issues, the presidency put forward a compromise text containing the elements that have the most support from member states,” a statement from The European Council reads. “However, at this stage a number of delegations cannot accept the text for political reasons as a matter of principle, while a few others are not satisfied yet with some specific points in the text. That text did not gain the necessary support and was not discussed in detail.”

Unfortunately for the European Union, this is the issue with any material changes made to rules and regulations. A collection of 27 member states certainly creates influence on the global and political stage, though it only takes one detractor to spoil any plans.

Looking at the suggested middle ground, a Franco-German joint declaration made a point which will please some more than others. The objection here is down to the wording of the proposal with France and Germany believing advertising revenues should be targeted, pushing Facebook and Google into the line of fire, as opposed to digital revenues as a generic term.

In France and Germany, some of the world’s largest internet-based businesses would gain a reprieve. Should the new rules target digital advertising revenues specifically, while subscription services, hardware and online marketplaces would escape. The likes of Amazon, Apple and Spotify would be free to continue practising their suspect taxation strategies.

The pattern of affairs here is something which should be pleasing for the internet giants, or at least most of them. What started as an assault on the internet players is starting to look like a very different battle nowadays, leaning much more towards Google and Facebook specifically.

These two might feel a bit victimised, but the ways things are heading it looks like a deal which is accepted by every member state would not be the victory the Brussels bureaucrats originally envisioned. With bureaucrats under pressure to produce a plan, accepted by all member states by March 2019, a lighter touch approach will be needed. We suspect such a plan will be put together, championed as a revolutionary position, though the internet players will be given enough wiggle room to ensure there is no meaningful victory.

What will help internet players sleep at night is the knowledge they only need to get one member state on side to veto the battle plan. Rev up the lobby machine!

Nordics oppose Europe’s tax assault on Silicon Valley

Sweden, Denmark and Finland have all come out in opposition of Europe’s plans to have a tax crack-down on Silicon Valley firms, questioning the long-term benefits to the bloc’s economy.

The question of taxing the internet companies has been a long-running one, and while the European Commission’s plans might have attracted interest from headline-chasing politicians there has also been a fair bit of criticism. Of course the internet companies are against the plans, but several smaller nations have questioned the logic, while there was also an indifferent response from the highly-influential Germany.

The ‘Digital Tax Package’ presented by the European Commission essentially allows the taxation of digital activities and digital business models in the EU based on revenues. Should the rules get the green light,  European and non-European companies would have to pay a 3% tax on all their European revenue from digital services, irrelevant as to whether they are profitable or not. The aim to make sure companies who are profiting off European citizens are paying a fair level of tax in those nations.

Current rules on taxation are based on the company having a physical presence in the nation. While there have been organizations who have been able to take advantage of this in the past, it was the elephant in the room. It would appear the European Commission has an issue with the rapid rise in the number of organizations who can profit from the rules, as well as the concentration in technology hotspots around the world (which are primarily outside the grasp of the European Commission).

“The proposals partly shift taxing rights to the country of the consumer or the digital user, based on the premise that these contribute to value creation in the digital economy,” states the letter signed by Magdalena Andersson, Kristian Jensen and Petteri Orpo, the Financial Ministers for Sweden, Denmark and Finland, respectively.

“This deviates from internationally established principles. Traditionally, exporting firms do not pay taxes in their export destination simply because they have consumers there. The proposal for a digital services tax means that basically all value creation is deemed to take place at the location of the consumer. Furthermore, a digital services tax deviates from fundamental principles of income taxation by applying the tax on gross income, i.e. without regard to whether the taxpayer is making a profit or not.”

This seems to be the main point of the argument. The European Commission is breaking from traditional tax laws and attempting to create new precedent, which the trio argues is something which should be considered from an international level, notably the Organisation for Economic Co-operation and Development (OECD). There does need to be changes to the way in which companies are taxed in light of the rise of digital business models, but you do have to have some sympathy for the arguments of the Nordic team; the process should be managed by an organization which would be considered more impartial.

However, what should be taken into account is the bias of Sweden, Denmark and Finland. The Nordics are home to several notable organizations who have benefitted from the freedoms in the digital economy, music-streaming service Spotify is one, while gaming app developer Supercell is another. Of course these countries are going to protect their own.

What is worth noting is that not every digital business will be subject to the proposed tax rules. To be considered, the company would have to fit at least one of three criteria of generating €7 million in annual revenues in a Member State, having more than 100,000 users or over 3,000 business contracts for digital services generated in one taxable year. A second proposal will target larger organizations which are more creative with how they report revenues and also those who collect data through other means.