Will a narrower scope save the EU’s digital tax proposals?

09 January 2019

UPDATE - 8 January 2019

The idea of an EU-wide interim tax on digital services (to avoid creating disparate rules across the EU) now appears to have faded away: in late December 2019, the French Government announced that it is to impose its own tax from 1 January 2019. Austria has also announced plans for a similar standalone tax on digital services to take effect by 2020: the UK’s own digital services tax is intended to come into force by 1 April 2020 unless the OECD has agreed international proposals by that date.

Resistance to the EU Commission proposals for an interim tax on digital services, to be put in place until the OECD has agreed a global approach, has been growing in recent months: it was widely expected that the proposals would be sidelined or dropped at a meeting of EU finance ministers on 4 December. Ireland, Luxembourg, Denmark, Finland, and Sweden were expected to oppose the proposals – in part because of fears of retaliatory action by the USA.  

EU rules require unanimous agreement from all member states to implement new tax rules. Therefore, in a bid to keep some form of interim digital tax reform on the EU agenda, immediately before the meeting, the French and German finance ministries proposed a new, much narrower, version of a digital tax. 

The new draft proposals would impose a 3% tax on advertising revenues generated in the digital economy – so Google, Facebook and online giants with similar business models would be expected to be subject to the tax. However, excluding activities like platform services and the sale of user-generated data will mean that most online retailers such as EBay and Amazon would not be within the scope of the proposed tax.  

As with the EU Commission’s original proposals, the proposed tax would only be an interim measure: it is suggested that the new tax would only take effect if the OCED cannot put global standards in place by 2021. However, the French and German governments propose that this plan for an advertising based tax is agreed by March 2019 at the latest. While the timescale for agreement is related to the EU parliament elections in May 2019, EU wide agreement before 29 March 2019 would also tie the UK into the plans, superseding the UK’s own proposals for a broader based digital service tax.   

It is notable that this would be a minimum agreed scope within the EU, and flexibility would be retained for individual member states to introduce broader measures.

It remains to be seen whether any new digital tax will be acceptable to some EU member states or whether the proposals go far enough for others. Therefore, it is quite possible that countries will take matters into their own hands and that a patchwork of different rules will emerge before the OECD can achieve agreed international standards. 

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