EU Considers Digital Tax Escape Hatches As Debate Rages (1)

Oct. 25, 2018, 5:11 PM

Confidential working papers from the European Union indicate the bloc’s lawmakers are considering ways to wind down its controversial 3 percent digital tax.

The strategy could allay fears from countries who worry the proposal could become permanent. The logic was laid out in a document obtained by Bloomberg News, dated Oct. 22 and prepared in advance of a November meeting of the bloc’s finance ministers.

The 3 percent tax aimed at companies like Facebook Inc. has always been considered a temporary measure that would remain in place until there is broader consensus. But the EU needs unanimous agreement on the measure, and countries like Ireland—which worked out a special deal with Apple Inc., that later was ordered to repay 13 billion euros ($14.7 billion) in tax—have staunchly opposed it.

The U.S. chimed in earlier this month in a letter from top Senate tax writers, flagging that the proposal “could conceivably last indefinitely.”

The EU could cede ground to the Organization for Economic Cooperation and Development, and reconsider the tax if the OECD reaches consensus on its own solution before the tax expires, according to the document.

The document also gives a second option, which would call on the European Commission to submit to bloc leaders a report on the OECD’s progress at least 18 months before the digital tax’s scheduled expiration date. The commission could then present a proposal to amend the tax.

Facing Obstacles

The digital tax would apply to digital companies with total annual worldwide revenue of 750 million euros ($860 million) and EU revenue of 50 million euros.

Taxing digital companies is also a top priority for the OECD. The OECD’s final report on digital taxation will conclude in 2020. The OECD has pushed for broad agreement rather than unilateral action.

The U.S. has vociferously opposed the digital tax proposal because it would target many U.S. technology companies.

“A tax should be based on income, not sales, and should not single out a specific industry for taxation under a different standard. We urge our partners to finish the OECD process with us rather than taking unilateral action in this area,” U.S. Treasury Secretary Steven Mnuchin said in an Oct. 25 statement.

No Double Tax Worries

A separate document, also dated Oct. 22 and prepared by Austria, addresses a top concern from the U.S.

The EU’s proposal would lead to double taxation of multinational companies, Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) and ranking member Ron Wyden (D-Ore.) said in their Oct. 18 letter.

That’s because “the EU already has a revenue tax based on the location of the customer,” the value-added tax, the letter said.

But the EU argued that double taxation is “impossible,” because the proposal is a turnover tax, rather than a tax on corporate income, according to the document.

The tax would be “levied on a ‘destination basis,’ so that only one state, the state where the consumption or use takes place, is entitled to tax the revenue,” the document said.

To contact the reporter on this story: Isabel Gottlieb in Washington, D.C. at igottlieb@bloombergtax.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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