EU ready for clash with Big Tech over new digital tax

The new European Commission has yet to be sworn in but the battle lines are already being drawn up for an EU-wide digital tax aimed at Silicon Valley’s Big Tech.  

Within days of being appointed the new Commissioner for Economic Affairs, Paolo Gentiloni, warned he will goahead with an EU digital “web tax” targeting the world’s tech giants if global negotiations between the OECD and the G20 fail to come up with a new proposal.

In no uncertain terms, Gentiloni declared that the EU is no longer “prepared to wait.”

That’s street-fighting talk from the usually mild-tempered former Italian prime minister. It’s certainly a big change of tone – some might say an overly ambitious one – considering the spectacular failure of the EU’s earlier plans for a web tax which were dropped late last year after some member states blocked the move.  

But Gentiloni’s threats will be backed to the hilt by Margrethe Vestager, otherwise known as Silicon’s Valley tormentor–in–chief. Vestager, who is now the EU’s second most powerful woman after president, Ursula von der Leyen, has been reappointed Commissioner for competition but also has a new role as executive vice-president with the grand title of being in charge of a “Europe fit for the digital age.”

It’s an enormous role, one that Vestager will take on with alacrity if her past record of beating up tech giants like Apple and Google is anything to go by. With her new powers to set the EU’s broader policy on the digital area, you can be sure she will be even more of a vocal critic of what is perceived as the unfair tactics of the FAANG companies – the Facebook, Apple, Amazon and Google tech monsters.

Yet Vestager’s crusade for a more equitable tax regime might also set her on a collision course with some of the EU’s member states. If there is one subject that EU members, particularly smaller countries such as Luxembourg, Ireland and to some extent, the Netherlands, don’t like being lectured on, it’s their tax affairs.

A member state’s flexibility to set national tax rates and play tax arbitrage is to many countries a question of national status and an emotive one. It’s also a potentially explosive one: Ireland is fighting against an order from Vestager herself to claw back a record 13 billion euros in back taxes from Apple.

Yet having the ability to cut corporation tax has been, for countries such as Ireland, a huge boost to their economy. By offering lower tax rates to attract tech firms such as Apple, they have been able to create thousands of jobs.

But for countries such as France, Italy and Germany – which drove the EU’s digital tax proposals – allowing Google and Amazon to not pay their fair share of corporation tax in the country of operation has become acutely political and led to widespread public outrage.

So it’s not surprising that the EU’s failure to agree on a digital tax led President Emmanuel Macron to introduce a new levy on tech giants like Google and Amazon. Nor was it surprising that the move threatened an all-out trade war between France and the US after President Trump said he would retaliate by raising taxes on French imports like wine.

Trump’s threats appear to have paid off. Indeed, there are suggestions that the potential skirmish was smoothed over at the recent G7 meeting at Biarritz. Officials from both countries are said to have come to some form of agreement that France would refund any levies if there is a future international agreement.

So what happens next? The OECD is due to publish the outlines of a plan in mid-October, ahead of the next meeting of G20 finance ministers and central bankers set for October 17 in Washington. The OECD’s officials have been working with policy-makers in more than a hundred countries to discover what sort of tax arrangements would be palatable to reach consensus.

That won’t be easy. The OECD’s Pascal Saint-Amans, who is leading the negotiations as head of tax policy, knows he has two tricky issues that need sorting: how to tax companies that are not taxed currently, and how to reallocate tax assessment rights. The second is the creation of a minimum tax on profits.

Saint-Amans has admitted that the first challenge is to make a company taxable in a country even when it is not physically present. It’s a goal that can only be reached if companies are made to pay a bigger share of its global profits to the country where its market and clients are. For example, allowing France to tax foreign digital firms.

The second is to work out how a minimum global tax on profits would work. It is understood that the proposals are such that if a company operates abroad – and this activity is taxed in a country with a rate below the minimum – thecountry where the firm is based could recover the difference.

Whether the OECD can come up with proposals that are acceptable to all the EU member states is impossible to tell. What is known is that past relations between the OECD and the EU do not augur well. Previous attempts at working together have been marred by competition, and indeed animosity, over policy.

Stef Van Weeghel, global tax policy leader at PwC and Professor of International Law at the University of Amsterdam, hopes the OECD will be able to find a consensus that meets approval with the EU.

But Weeghel is not sanguine about the outcome: “Achieving a fair taxation policy across the EU is riven with politics. Countries do not want to give up their tax policies. But it is important there is a positive outcome because businesses need certainty.”

And if these tech companies are to stay operating in the EU, taxes must be fair. As Jean Baptist Colbert, the French finance minister under King Louis X1V, remarked: “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”