Written by: Nishant Sabnis
There is currently a debate within the European Union (EU) over a new tax on large technology companies. Called a “Digital Tax” by many of its critics and an “Equalization Tax” by many of its supporters, the possible tax, if levied, would aim to alter how tax revenue is distributed among EU member countries where large digital technology companies operate and generate revenue.
For several years, numerous multinational companies, including many tech companies, have managed to enjoy lower taxes on the profits they earned by shifting the profit to offices in countries that impose lower corporate tax rates, such as Ireland and Luxembourg. Many EU countries even have a low rate specifically for technology companies, where they often pay less than half the rate of companies in other economic sectors. By shifting their profits to be taxed in these tax havens rather than in the countries where they earned the revenue, companies avoid paying billions of euros in taxes across the EU, with each of the largest companies saving hundreds of millions of euros annually. If the proposed tax is implemented, it will levy an additional tax, likely close to 3% on any tech company with revenues exceeding 750 million euros globally. The money from the tax will then be distributed to EU countries who lost revenue from profit shifting. While some EU member tax havens may lose some of their competitive advantage over other EU states, this rate will not significantly alter the tax burden technology companies face compared to other industries.
The proposed tax is just one of a number of policies and rulings by the European Union, both potential and currently in place, that are aimed at combating what many EU authorities see as unfair business practices by digital technology companies operating in Europe. For example, EU officials have fined technology companies for unfairly blocking competition, with notable fines against companies like Google and Qualcomm. In other cases, authorities have criticized improper handling and use of data by large digital technology companies.
Support for this proposed tax comes from a number of member states where large corporations operate but do not pay taxes on their profits. Proponent countries champion the proposition as a means to regain lost tax revenue they are entitled to receive. On the other hand, tax havens like Luxembourg and Ireland have criticized the tax for fear that they will lose their competitive edge in attracting jobs and tax revenue.
It is unclear exactly how the tax revenue will be collected if such a tax is levied. In general, the EU entities themselves do not impose taxes on individuals and corporations. Instead EU countries are responsible for tax imposition and collection. The EU plays a more supervisory role, helping regulate taxation among its member countries. For the proposed digital tax, this would likely mean that the EU countries themselves have to collect tax revenue as mandated by the EU. Since the proposed tax seems would likely discourage profit shifting rather than prohibiting it outright, tech companies may continue to move their profits to EU tax havens, making the very EU states losing out from the proposed tax responsible for collecting it. With this dilemma, it is hard to predict whether the tax could be effectively enforced if it is imposed.
While opponents may criticize this tax as nothing more than supranational overreach similar to past EU tax levies and regulations, it instead will likely control for unfair practices by these tech companies and the tax havens that host their corporate offices at the expense of other EU countries, allowing for a more fair and orderly business environment in the EU. This tax levy, if imposed, would discourage profit shifting between EU member countries, allowing non-tax haven EU countries to recover at least some lost tax revenue. While the levy is light and only taxing corporate profits, tech companies subject to the tax will likely remain profitable in their EU markets and thus are very unlikely to leave. Overall, this proposed tax would help move the EU towards greater equity among member countries.