Daily Tax Report: International

EU’s Digital Tax Proposal Will Hurt Trade, U.S. Businesses Warn (1)

Jan. 29, 2019, 3:34 PMUpdated: Jan. 29, 2019, 7:57 PM

The European Union’s short-term tax targeted at digital advertising is aimed solely at U.S. tech companies Google Inc. and Facebook Inc. and enhances risks of trade retaliation, business tax lobbyists and researchers said.

The digital tax proposal, which will be decided by EU finance ministers in March, “fails to learn the lessons of the past year,” U.S. Council for International Business Tax Committee Chairman William Sample said Jan. 29.

“They have now come full circle,’' Sample, who formerly headed the tax office for Microsoft Corp., told Bloomberg Tax after speaking at an EU Economic and Social Committee hearing on digital taxation. “They are back to talking about a tax on Google which first came up 10 years ago.”

“This will just lead to trade distortion and other problems,’' Sample added.

The EU launched a digital service tax in March targeting digital advertising companies as well as online intermediate platforms and data sellers. After a failure in December to get the unanimous consensus of 28 EU member states, the scope was narrowed.

Wolfgang Schon, director of the Max Planck Institute for Tax Law and Public Finance, said at the hearing that the EU should extend its current value-added tax rules to cover user value creation.

“This would resolve the debate about whether to tax digital activities where they are consumed or where non-resident companies are based,’' Schon said.

Robert Stack, former U.S. deputy assistant secretary for international affairs at the U.S. Treasury Department, warned the EU as well as the OECD that any agreement on digital taxation must avoid double taxation and ensure tax certainty.

Stack said it was vital that international tax dispute mechanisms are upgraded.

“This might include, for example, including binding mandatory arbitration as part of a minimum standard in connection with any new rules,” said Stack, who currently is a managing director with Deloitte LLP and also was a co-chair of the OECD base erosion and profit sharing group on digital taxation.

More than 10 EU member states are moving ahead with unilateral digital turnover taxes on large internet companies. Bert Zuijdendorp, head of company tax initiatives at the European Commission, emphasized that these individual measures justified the need for an overall EU digital advertising tax such as the one EU finance ministers will vote on in March.

“We need this to protect against the fragmentation of the EU single market,’' Zuijdendorp said.

Sample and Stack warned that unilateral measures as well as the EU temporary levy proposal risked undermining the chances of getting an overall OECD agreement.

“We are at a crossroads at the OECD,” Sample said.

“The EU should stop its unilateral efforts. This not only hurts EU credibility at the OECD but it also risks causing big problems as large countries in Asia could use the same approach on EU imports,’' he said.

(Adds comments from Sample and Zuijdendorp on the need for an overall EU digital advertising tax in paragraphs 11-15.)

To contact the reporter on this story: Joe Kirwin in Brussels at correspondents@bloomberglaw.com

To contact the editors responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com; Vandana Mathur at vmathur@bloombergtax.com

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