EU planned digital tax risks fuelling tensions with tech giants

Silicon Valley tech giants like Google, Amazon, Facebook, and others would be most affected by the new taxes

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EU digital tax
EU digital tax

The European Union new tax policy for multinational corporations is a direct threat to all companies that operate in the Eurozone and beyond.

The European Commission is considering a plan to tax corporate profits where they are generated, rather than in the nation where the company’s headquarters is located. That means Microsoft would be taxed on the amount of revenue it generated in Germany and France, rather than the tax rate in Ireland where its European headquarters is located.

The EU is bending to popular sentiment against foreign, mostly American and Chinese corporations, and is trying to make up for the revenues it is forecasted to lose through Brexit. A draft plan reviewed by The New York Times indicates that the cost of doing business in Europe would increase under the plan.

Corporations like Google would have to pay different tax rates in different member states. That will increase accounting costs, legal expenses, and administrative costs because a company that operates in the EU might have to file 28 different tax returns. Companies might have to hire separate law and accounting firms to handle tax issues in different nations.

The tax is designed to generate more revenue from businesses that make money from digital means, an EU press release indicates. Additional taxes will cover digital intermediaries, e-commerce platforms such as Amazon, and revenue from digital advertising. The EU is also planning to tax data mined from user-provided information.

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs in video below said “The digital economy is a major opportunity for Europe and Europe is a huge source of revenues for digital firms. But this win-win situation raises legal and fiscal concerns… That’s why we’re bringing forward a new legal standard as well an interim tax for digital activities.”

Digital companies tax rates increase

Effective tax rates on digital businesses might increase from 9.5% to 23.3% under the measure, The New York Times estimated. That would be in addition to VAT (Value Added Tax) and other sales taxes, and higher than the current US corporate tax rate of 21%.

Silicon Valley tech giants like Apple and Amazon would be most affected by the new taxes. Other enterprises at risk from the new taxes include insurance companies, banks, social media platforms and gaming platforms.

Banks were particularly vocal to the proposals and deplored the digital taxation. In a press release, the European Banking Federation (EBF) emphasised that only a global approach would have the potential to ensure a level-playing field and avoid unintended double taxation.

EBF, CEO, Wim Mijs said “Digital activities carried out by banks and banking groups are exercised in a very strict regulatory framework and do not induce base erosion and profit shifting by nature.”

Other risks from the new tax policy include decreased trade and economic activity and the breakup of large companies. Some companies might try to avoid the higher taxes by pulling out of certain nations or setting up subsidiaries to conduct business in specific countries.

The segment of the insurance industry most affected by the EU’s action will be those companies that sell policies online. Online insurance brokerages and companies that market or mine insurance and risk data would pay higher rates under the EU’s proposal. It specifically covers digital intermediaries and profits from the sale of data from user-provided information. Also affected will be those companies that insure tech enterprises.

To become law the proposed tax increase will need to be adopted by the European Council and approved by the European Parliament. No timetable for those actions was provided by the EU press release.

More taxes on digital products and services

The risk of increased taxation is growing as popular sentiment against income inequality and the rich increases. The EU proposal is simply one of many suggestions for increasing taxes on digital businesses.

Companies like Google and Facebook should be required to redistribute part of the profits made from users’ data to everybody, Steve Fuller, a professor of sociology at Warwick University suggested. Fuller offered such a tax as an alternative to universal basic income (UBI) in a debate in Budapest in 2017.

Most UBI proposals involve significant tax increases in taxes on individual or corporate income. American presidential candidate Andrew Yang’s platform includes a $1,000 a month UBI paid for by a 10% value-added tax (VAT). Yang’s platform is essentially one of class warfare against wealthy Americans whom he blames for the nation’s problems.

The risk of new taxation is growing dramatically especially to companies that operate in many different nations. All businesses should prepare for higher taxes and increased expenses from taxation. Insurers will need to amend policies and modify sales practices to deal with an increased risk of taxation.

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