EU digital tax plans are off the table, but national efforts are still on a collision course with Trump

Europe has formally abandoned its plans to impose a digital tax - for now - but this signals a flurry of national-level policy changes and does nothing to dispel the looming threat of conflict with the Trump administration in Washington.

The European Union (EU) had been debating imposing a revenue-percentage tax on digital giants for months, with France leading the charge with increasing impatience and ever-more shrill demands.

These however were met with defiance from the likes of Ireland and various Nordic states. As tax reform decisions need to be ratified by all EU member states, that delivered a digital Waterloo on the French plans.

The official EU stance now is to wait for an agreement across G20 countries via the offices of the Organisation for Economic Co-operation and Development (OECD) on how to tackle fair taxation in a digital economy. The OECD hopes to have a solution by the end of next year, but in the meantime individual countries are putting in place their own plans and going it alone.

The UK has announced plans for a 2% of national revenues tax on digital services providers to come into effect from April next year. Chancellor Philip Hammond said at the time:

We cannot simply talk forever. So we will now introduce a UK Digital Services Tax. This will be a narrowly-targeted tax on the UK-generated revenues of specific digital platform business models.

Austria has gone one percent higher with plans for a 3% tax, with Finance Minister Hartwig Loeger clearly irritated at the lack of EU consensus on the issue:

Once again Europe has not managed to find a common position on this issue…we will implement and stick to what we have always said, namely introduce a national digital tax in Austria.

Polish Prime Minister Mateusz Morawiecki is equally of the view that there’s no time to wait around for the EU to come to common agreement:

We want to do it together with all EU countries, but the Austrian example shows that, if there is no consensus, member countries will have to take this decision - I hope, not long from now - on their own, independently and with responsibility.

And even France, the most hectoring proponent of unified action, is now set to go its own way, claiming that a national tax could rake in an additional €500 million per year.

What's the hurry?

But if the OECD reckons it’s on track for a global policy by next year, what’s the rush here? Most of these national tax regimes will come into play in 2020 anyway, so why not hold out for a few months longer?

The cynical interpretation is of course that while all the right political noises are being made about the G20 and the OECD’s efforts at co-operation between global states, the reality is more likely to be akin to a bag of cats - 127 cats with their own self-interest to protect.

And while some commentators have cited the likes of Russia and China as likely spanners-in-the-works of achieving consensus, there’s also the question of the current occupant of the White House, likely heading into a re-election campaign on an America First ticket in 2020.

So when German Chancellor Angela Merkel said this week that she is optimistic that US President Donald Trump is interested in a global tax regime, one that would most impact on US tech firms, it was a statement that owed more to political platitudes than to reality.

For its part, the EU remains equally naive. In an interview with CNBC earlier this week, Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, took an all-too-familiar tone when he stated:

We are not disputing the capacity of the US to decide on their own tax issues and they must also respect our own national and European sovereignty…These digital taxes, and our proposals, are not anti-US.

That’s not a message that is being well-received in Washington, where Chip Harter, Deputy Assistant Secretary (International Tax Affairs) at the US Treasury, this week dismissed the EU proposals as “ill conceived”, saying:

We view them as highly discriminatory against US businesses...We think the whole theoretical basis of digital service taxes is ill-conceived and the effect is highly discriminatory against US-based multi-nationals.

He argued that national taxes imposed by individual states will only make it more difficult to reach a consensus in the future:

A DST (digital services tax) simply is so narrow that it doesn't address the fundamental issues facing the international tax system.

And in words that should send a chill down the spine of post-Brexit UK government in search of a trade deal, he added:

The United States opposes any digital services tax proposals, whether they be French or UK.

My take

The chances of the OECD coming up with anything more than a fudge on this subject by 2020 is inconceivable. As I’ve said before, Trump may hate Amazon CEO Jeff Bezos, but he’s not going let other countries undermine a US tech success story while he’s out on the stump making America ‘great’ again.

That said, there’s still no clarity no how the various EU national schemes are actually going to work if the US tech providers won’t provide national breakdowns of revenues. If the resulting national tax bills end up being based on guess-timates, a lot of governments are going to find themselves tied up in courts for a long, long time before a single penny or Euro gets handed over.

We'll still be talking about this for years.