The idea of taxing the revenue of tech giants like Alphabet Inc.'s Google and Facebook Inc. is taking root in more countries—Poland and the Czech Republic being the latest—as they rush to develop their own plans in the absence of a global consensus.
Countries have become increasingly impatient to adopt unilateral tax measures after efforts to pass a European Union-wide digital tax stalled this year. And a promised Organization for Economic Cooperation and Development global solution is at least a year away, if a consensus can be reached.
Tax administrations planning to impose the new measures say the likes of Google and Facebook don’t pay enough tax or don’t pay it in the right places. They also argue that current global tax rules don’t appropriately capture the way these companies make money.
“Countries need revenue, and they are looking to the digital economy,” said Carol Doran Klein, vice president and international tax counsel at the U.S. Council of International Business. “They see that as where the money is. They see it as politically acceptable.”
But digital-only measures have met stiff resistance from other countries. The U.S. says that a tax that targets or “ring-fences” only one segment of the economy is unfair. Many of the proposed digital taxes would hit mostly U.S. companies.
“These digital taxes are fast becoming the new norm and the difference in what types of revenue they tax and what the rates at which they are levied will mean that it’s very difficult for multinational tech companies to navigate what their tax bill is,” said David Klass, a partner at Hunton Andrews Kurth, LLP.
How it works: Austria put forward plans in April for a 5% tax on digital advertising models. The government said the tax would target large multinational entities and online platforms above a size threshold, similar to the EU proposal. The proposal also includes measures to boost value-added tax collection from online third-party platforms.
What’s next: The government expects parliament to take up the legislation before its August break, a spokesperson for the Austrian Ministry of Finance said May 7. If the package of legislation passes, the measures would become effective on Jan. 1, 2020.
How it works: The Czech finance ministry made headlines April 30 when it announced the steepest digital tax rate yet: a 7% levy on digital revenue. The tax could apply to advertising and the sale of user data on internet platforms that have global revenue of more than 750 million euros. The country has yet to set a minimum threshold for domestic revenue generated in the Czech Republic or reveal full details of the plan. The new tax should bring about 5 billion koruna ($219 million) of extra revenue to the state’s budget.
What’s next: The government may release more details at the end of May and will likely try to push the legislation through the parliament in time to make the tax effective at the start of 2020, said Stepan Havranek, an associate at CMS in Prague.
How it works: A French bill would impose a 3% tax on revenue from digital advertising, user data sales, and third-party platforms, applying only to companies that earn at least 750 million euros in worldwide revenue and 25 million euros in domestic revenue.
What’s next: The bill passed the National Assembly April 9, and will likely be taken up by the Senate later this month. The tax would apply retroactively, as of Jan. 1 2019, and companies could owe their first payments as soon as October.
How it works: An April proposal would let India consider the number of a tech company’s digital users when determining what share of profits India can tax. The proposal follows 2018 legislation establishing a “significant economic presence” test, which would allow officials to claim taxes on foreign companies that do substantial business in India even if they don’t have a physical presence, or permanent establishment.
What’s next: The significant economic presence rules aren’t yet in effect, and businesses are still waiting for further guidance. The April proposal is open for public consultation until mid-May.
How it works: Italy’s tax would target companies that make more than 750 million euros worldwide and at least 5.5 million euros in Italy on revenue from online advertising and the sale of user data.
What’s next: Lawmakers passed a bill in December, but companies that could be affected by the tax are still waiting for a decree from Italy’s tax authority to understand how the tax will apply. Italy missed an April 30 deadline to release the guidance. The tax would become effective 60 days after that decree is published.
How it works: New Zealand’s government said in February it was considering pursuing a digital services tax while waiting for an OECD solution.
What’s next: The government is scheduled to publish a discussion paper in May, when the government will decide if it wishes to pursue the tax. New Zealand’s neighbor Australia has already abandoned similar plans, instead adopting a wait-and-see approach as the global conversation progresses at the OECD.
How it works: Poland’s government aims to introduce a digital tax effective in 2020, a finance ministry official said April 29. The measure would be modeled on the EU’s stalled digital tax proposal: establishing a virtual taxable presence for companies that meet thresholds for revenue, users, and contracts for digital services; and targeting revenue from services like online advertising and user data, the official said.
What’s next: The government expects to publish a formal proposal for the tax in June, the official said.
How it works: Spain was planning a 3% digital tax, targeting activities including online advertising, intermediation, and transfer of user data. But the government put the plans on hold in February when it wasn’t able to get approval for its budget.
What’s next: Spanish Prime Minister Pedro Sanchez’s April 30 economic plan included a digital tax on online services. Sanchez will set his tax plans in place if his Socialist party wins needed support in Parliament.
How it works: The proposed measure is a 2% tax on some digital revenue of companies that generate more than 500 million pounds ($653 million) of in-scope global revenue and U.K. digital sales of 25 million pounds. The measure targets revenue from social media platforms, search engines, and online marketplaces that are “linked to the participation of U.K. users.”
What’s next: The U.K. government has published the most detail on its digital tax as part of a consultation that closed in February 2019. Its findings are expected to be published this summer. The government has indicated that it will include its digital services tax as part of its Finance Bill 2019, which will become effective in January 2020, with the first tax bill due in April 2020.
—With assistance from Hamza Ali.