Six European countries face inevitable legal challenges on new digital taxes they’re imposing on the revenues of tech giants like Amazon.com Inc. and Facebook Inc., according to tax practitioners.
Austria, France, Italy, Spain, Belgium, and the U.K. launched their own digital service tax (DST) regimes in 2019 after talks on a European Union-wide 3 percent levy stalled. While none of these countries has published full guidance on their plans, some like France have said the taxes will apply retroactively from the beginning of 2019.
But the new rules could meet stiff resistance. Challenges will likely arise at the start of 2020, when companies are first assessed for the tax, and an international trade dispute could begin brewing even sooner.
Here are five ways the tech giants challenge the taxes.
Companies could argue that the laws are unfair because they treat some businesses differently than others.
Bringing a case under domestic law in the country where it’s being taxed, a company could claim discrimination on the grounds of size or nationality, said Robert Van der Jagt, chairman of KPMG’s EU Tax Center in the Netherlands.
For example, a company could argue the draft Spanish tax only targets foreign technology companies and not Spanish ones, or that it discriminates against big companies by exempting those whose revenues are less than a certain threshold.
Most often, companies challenge taxes by pointing to the law’s technical wording to claim it doesn’t apply to them, said Kelly Stricklin-Coutinho, a barrister at 39 Essex Chambers. This kind of challenge is also likely to be litigated sooner than others, she said.
“The type of issue that might be litigated first may be discrete ones that can be hived off from the main issues—ones which can be taken as a preliminary point,” she said.
EU competition law offers another forum: European Commission state aid investigations, which look into instances in which a European country has given an unfair advantage to one company, such as through a subsidy or tax ruling.
“If the plans have some particular provisions which make some particular companies better or worse off, then we can move to the state aid channel and see what happens,” said Georgios Petropoulos, a research fellow at Brussels-based economic think tank Bruegel.
But a state aid case in the EU might be difficult to win, as the companies being targeted by most of these digital taxes are often being investigated by the European Commission for unfair business practices, Stricklin-Coutinho said.
The commission has used the investigations over the last five years to challenge tax arrangements between European states and multinationals like Amazon and Starbucks Corp. In the biggest transfer pricing case, the commission asked Ireland to collect 13 billion euros ($14.8 billion) in back taxes from Apple. The case is still pending appeal.
A company that’s based in Ireland and subject to the French DST, for example, could ask Ireland to invoke the conditions of its tax treaty with France to claim that France doesn’t have the right to tax that income.
That situation could eventually lead to a dispute between the two tax authorities through a mutual agreement procedure, an international arbitration forum for tax treaty disputes.
Tax treaty arbitration over DSTs would hinge on a legal question: What kind of tax is a DST?
So far, DSTs are being levied on revenue instead of profit, which means some income could be taxed twice. The EU-wide version of the DST has been challenged on these ground in a Oct. 8 legal opinion, issued by the European Council.
But the key question for countries is whether a DST falls under the taxes typically covered by treaties, Van der Jagt said. This means companies need to check whether the jurisdictions in which they’re headquartered provide a tax credit for DST that they’ve paid elsewhere. Direct taxes like income taxes are covered by treaties, while indirect taxes like withholding taxes aren’t.
“To make a long story short, if there is a possibility to evoke a double tax treaty, you basically make it much more difficult for the source state to impose the DST,” he said.
World Trade Organization
Companies could leave the governments in their home countries to handle the dispute for them as a trade issue.
The U.S., where most of the largest digital companies are based, could bring a trade dispute to the World Trade Organization, said Dan Neidle, a partner with Clifford Chance.
In an October letter to EU leaders, then-U.S. Sen. Orrin G. Hatch and Sen. Ron Wyden, the chair and ranking member of the Senate Finance Committee, warned that an EU-wide DST “raises concerns” about WTO obligations.
“The turnover thresholds for the EU DST Proposal are discriminatory, putting in-scope companies at a competitive disadvantage without objective justification,” Hatch and Wyden wrote.
The U.S. could also use such a challenge to bring in its own retaliatory tariffs against EU companies, Neidle said.
But a trade dispute could be difficult to win because the taxes capture any company that meets the revenue threshold, not just U.S. ones, he added.
Companies generally have to be assessed for the tax before they can challenge it, Van der Jagt said. That means the first of the challenges could come in early 2020 after companies first pay the levies in countries that implemented them effective as of Jan. 1, 2019, like France.
The threat of legal challenges won’t deter the countries that are moving ahead, Van der Jagt said.
“I’m sure it won’t stop them,” he said. “They’ve got nothing to lose. They still see, by doing this, it helps us achieve a change in the global international tax rules. That’s the end goal.”
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