EU digital tax proposal to deepen competition in global digital economy

APD NEWS

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By APD writer Dong Yifan

The European Commission released a tax proposal on March 21 that it will levy on tech companies with significant digital revenues, which is also called “digital tax”, within Europe.

After announcing the proposal, US digital giants such as Facebook, Amazon and Apple expressed serious concerns on EU’s tax plan.

Many observers said the proposal is a counterattack against US plan on imposing steep tariffs on steel and aluminum imports announced in early March. The US move has harmed the interest of EU as the bloc is the second steel exporter of the US.

In fact, digital tax is a part of EU’s digital industry strategy and the commission’s preferred long-term solution. However, imposing hefty tariffs on digital giants is a double-edged sword for both the EU and the rest of the world. Some say it will intensify global competition in the digital economy.

Because of its huge population and economic scale, EU is one of the world’s largest digital markets, generating massive business volume and data every day. According to the statistics released by the EU commission, every day, 20 billion emails and 150 million social media posts are written, and 650 million online searches are carried out in the EU. The EU’s digital market size is estimated to be amount to 739 billion euro by 2020, contributing to four percent of its GDP.

But such big market doesn’t cultivate big companies. Global digital giants are mainly from US, China and Japan. Only Estonian Skype and Finnish Supercell, the latter of is the developer of famous game “angry bird”, are born in the EU. So from their perspective, the EU market should serve the development of local enterprises rather than foreign competitors.

Based on previous concerns, the EU commission released a “digital single market” strategy in 2015 as a macro-plan to boost its own digital market. The strategy proposed to increase investments to technologies as well as build and improve infrastructures so as to create a platform on promoting innovation and a better environment for the development of local companies. Digital tax is also an important part of the strategy. For EU itself, eliminating barriers of different tax systems in member states means companies just following the EU-level tax system, which help them expand their businesses in Europe without any system thresholds.

For countries outside the Europe, EU has introduced a new tax proposal to limit the entry of foreign companies to its territory. Over the past several years, EU has been pushing hefty tax on US digital giants. Apple’s branch in Ireland has been investigated by EU several times because EU argued that Apple abuses Irish low tax rate to avoid tax burdens in other EU member countries. France also required to impose extra tax on big companies such as Google. Even a business-friendly country like UK also proposed the tax collection on Google, which is called “Google tax” by UK media. As digital economy continues showing its huge potential and strong economic momentum, EU and its member states will pay more attention to the sector.

EU holds the idea that the European single market should not merely serve as a large user in the era of digitization. At the same time, foreign companies shouldn’t always benefit from the European market without any cost. So they put forward the digital tax plan. In September 2017, a joint letter written by German, French, Italian and Spanish finance ministers called for EU put a plan for digital tax in place. In the State of Union Address 2018, the European Commission President Jean-Claude Juncker also took the digital tax plan as one of EU policy priorities. All in all, digital tax plan reflects EU’s long-term concerns.

For ensuring future tax income, EU created a term of “digital presence “, which means that if digital companies outside EU provide services for Europeans, they will produce “digital presence” inside the EU. The term gives EU a reason to levy on those foreign companies which their headquarters are not located in EU. The significant digital presence in a country would be defined by at least one of three criteria: revenues of more than €7m per year; more than 100,000 users; or over 3,000 contracts for digital services per taxable year between the company and business users.

In the EU’s short-term standard, if one company generates 750 million or more of world revenue or 50 million of turnover in EU, it will become the EU’s target. EU has sent a signal to digital giants that if they want to continue their business in EU, they have to pay the money. The commission estimated that the EU will get around €7bn each year in the condition of 3% tax rate.

At the global level, EU intends to create a policy model for the future global rule of digital tax. Nowadays, international tax regime is entering an important period, which is also one of important agendas in multinational global governance platform such as G20 in recent years. Because the parties involved have divergence on tax rule for multinational companies, it is difficult to build an international tax regime framework.

Major parties tend to choose more unilateralism policies to grab their own interests. For instance, the Trump administration proposed a new corporate tax reform. Through the digital tax, EU also wants to have more says in the global economy governance. But EU’s one-side decision has caused widespread concerns in the worldwide.

Not only US big companies such as Apple and Google criticize the policy, but also international organizations like the Organization for Co-operation and Development (OECD) expressed their worries. The OECD’s report says that the EU digital tax means declining its openness that will impede the development of productivity and technology. In the future, other major digital countries may follow the example of EU,making the competition of global digital economy fiercer.


Dong Yifan,assistant professor of European Studies Institute, China Institutes of Contemporary International Relations. His research areas covered European economy, EU integration and China-EU relations.

(ASIA PACIFIC DAILY)