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Think Tank Critiques EU Digital Tax Proposal

by Ulrika Lomas, Tax-News.com, Brussels
Tuesday, March 13, 2018

The European Union has yet to make an effective case in support of proposals for special taxes on large digital companies, according to a new paper by the European Centre for International Political Economy (ECIPE).

Matthias Bauer, Senior Economist at the ECIPE, writes in the paper that while unfair taxation and uneven effective tax rates can distort competition and reduce tax revenues, those calling for higher taxes on the digital sector "have yet to present the evidence for why that is motivated by principles of fair taxation."

According to Bauer, the European Commission's estimates for effective corporate tax rates do not reflect the high effective corporate tax rates of most corporations that operate both in and outside the EU, including the world's largest digital enterprises.

He wrote that "the European Commission's selective focus on digital companies that are big on stock markets mixes up market capitalization with corporate income. Thereby, the focus on the world's top 100 companies by market capitalization and the world's top five e-commerce companies hardly reflects the reality of the digital economy and profit levels among different, often highly diverse, firms. Real world financial data show that the average corporate tax rates of many digital companies actually exceed the European Commission's hypothetical estimates by about 20 to 50 percentage points."

Bauer also contends that the EU's digital tax agenda contradicts other policy areas, particularly with respect to the removal of barriers to e-commerce in the single market.

"Ideas to slap a targeted tax on digital revenues clash with the EU's top policy priorities for the digital economy. It is therefore remarkable that such taxes even are considered. A tax on digital revenues would not only stand in opposition to tax efficiency and neutrality, it would also undermine digitalization, European integration, and the Digital Single Market," he concluded.

The European Commission is expected to propose this month that the revenues of large digital companies be taxed based on where their users are located.

The Commission proposes in a draft document seen by Reuters last month that the tax should be applied to companies with revenues of more than EUR750m (USD928m) worldwide and with EU digital revenues of at least EUR10m a year.

The tax would be calculated on the "aggregate gross revenues" of a business and would be charged at a rate of between one and five percent. Revenues would be taxed based on where the company's users are located, rather than on where the company is headquartered.