Unfriending European tech taxes
The United Kingdom announced that it would unilaterally enact a new “digital services tax” if certain countries do not figure out a cooperative way to tax multinational tech giants like Amazon, Apple and Google.
Spain has already passed its tech tax, and this week, the EU finance ministers neared a deal to enact a tech tax beginning in 2020.
Tech companies’ aggressive strategies to reduce their taxes have made front-page news around the world, and many policymakers have concluded that international tax rules — built for a bricks-and-mortar world — are inadequate to tax the modern digital economy.
As a frustrated response to the obsolescence of current international tax rules, tech taxes have been roundly and justly criticized because they discriminate against U.S. companies, operate as tariffs, result in double taxation, are passed on to consumers and invite retaliation. But the taxes have bigger obstacles to overcome.
First, they may violate EU law.
When adopted by individual EU member states, digital services taxes on big companies almost surely violate the state-aid rules that forbid both size discrimination and sector discrimination. As the $14 billion state-aid penalty due from Apple to Ireland amply demonstrates, the state-aid rules forbid special tax exemptions.
By exempting small competitors and non-digital companies from tech taxes, member states likely would confer illegal subsidies.
EU actions are exempt from the state-aid rules, but an EU digital tax might still be illegal. The framers of the EU’s digital services tax sought to target U.S. tech giants for taxation. To make sure they would tax American but not European companies, they exempted companies with global revenue of less than €750 million.
Many member states have few or no domestic companies that meet these high-revenue thresholds. These states would, therefore, impose the digital tax mostly or entirely on foreign companies — including U.S. companies and their EU subsidiaries.
While EU law does not protect U.S. companies from nationality discrimination, it does protect their EU subsidiaries from nationality discrimination. In prior cases, the EU Court of Justice has found covert discrimination when more than half the population liable to adverse taxation resided outside the taxing state.
Thus, by intentionally discriminating against U.S. companies, the digital services tax may inadvertently but illegally discriminate against EU companies.
The second reason for skepticism about digital services taxes is that even the proposals’ strongest backers do not seem to think they are a good idea. The proposals are openly framed as Band-Aids, meant to collect some revenue and exert pressure on the United States until countries reach a more appropriate and lasting agreement about how to tax the digital economy.
The problem with temporary solutions is that they tend to stick around. Consider the experience of the U.S. states: In 1967, the Supreme Court ruled that a state could not force a remote seller with no physical presence in the state to collect sales tax on sales it made into the state. Congress could have fixed this prohibition at any time, but companies lobbied to keep it.
For 50 years, until the Supreme Court finally overturned its ruling last term in Wayfair, the supposedly temporary rule cost the states billions in taxes and distorted competition between online and brick-and-mortar stores.
Companies that stand to benefit from the discriminatory features of the proposed digital services taxes could become powerful opponents of lasting reform that would cut across sectors.
Finally, a principal lesson from international taxation in the latter half of the 20th century is that unilateralism does not work. Companies excel at exploiting gaps between countries.
Rather than adopting a hodge-podge of stop-gap solutions for taxing tech, countries should work cooperatively through the Organization for Economic Cooperation and Development to reach consensus solutions that will be robust against changes in cross-border business.
Ruth Mason is the Class of 1957 research professor of law at the University of Virginia School of Law, and, this year, she is professor in residence at the International Bureau of Fiscal Documentation in Amsterdam. She was the national reporter for the United States to the International Fiscal Association Congress on tax discrimination.