Europe's 'turnover tax' threat to US digital giants is knee-jerk politics from the French

 

The Eurocrats may be talking tough on forcing firms like Amazon and Google to pay a ‘turnover tax’, but the US giants don’t need to panic just yet as the inevitable divisions among European Union (EU) member states have emerged almost immediately.

Finance ministers from ten of the 28 EU countries issued a statement over the weekend supporting proposals to tax revenues of digital firms, not their profits. The argument is that companies like Amazon use perfectly legal accounting practices to minimise profits in individual countries, despite reporting enormous turnover.

The idea is being driven by the French government with the support of Germany, Spain and Italy. In addition, Austria, Bulgaria, Greece, Romania, Slovenia and Portugal signed the statement, while Belgium and the Netherlands representatives made public noises of support. The statement said:

We should no longer accept that these companies do business in Europe while paying minimal amount of tax to our treasuries. Economic efficiency is at stake, as well as tax fairness and sovereignty.

Other EU members aren’t so sure. For example, Denmark’s Finance MInister Kristian Jensen warned that there is a danger of creating a seemingly anti-competitive environmnet that will deter inward investment:

We should be very careful we should be very careful not to tax the products because it is … our citizens [who] will use the products. If we make it more difficult to do that in Europe, then we’re perhaps pushing them to use Chinese, US products. I am … always sceptical by new taxes and I think Europe taxes heavily enough.

Jensen’s counterpart in Luxembourg. Pierre Gramegna said there’s no point in the EU taking action without a wider global consensus in place:

It does not make any sense for Europe to move without a global agreement.

Knee jerk

The main criticism of the French plan is that it is too much of a ‘quick fix’ knee-jerk reaction. France’s Finance Minister Bruno Le Maire however insisted that a speedy reaction is essential:

Otherwise we risk a breakdown with citizens across Europe.

Any change to to EU taxation rules requires support from all member states. EU President Jean Claude Juncker said in his State of the Union speech last week that there’s a need for majority voting here, but for now at least, the EU needs all members on board with any planned changes.

Interestingly the French proposals did not get the public backing of Estonia, currently in the rotating EU Presidency chair. It’s believed that Estonia, often cited as the most digitally-sophisticated economy in the EU, would prefer a solution that would allow member states to tax companies where they have a digital presence, rather than just where they have a physical presence as is currently the case.

Estonian Minister for Finance Toomas Toniste explained:

For us, it is important to agree on new international tax rules that also take into account the business models of the digital economy. This would guarantee the equal taxation of all companies regardless of their location or place of activity.

Toniste also noted that there would also need to be significant investment in upgrading IT systems across the EU in order to enforce commonality of approach:

Future customs union IT systems development require a change of policy in order to gain efficiency and cut costs for member states and trade, although the best method has yet to be decided. More discussions on the expert level are needed to achieve an agreement on how to go further. There is strong support for a pilot project and it could prove that the centralised approach to the IT works for the customs union.

The UK has maintained a public silence so far and with post-Brexit membership of the customs union far from certain, seems likely to continue along those lines. But it’s believed that UK Chancellor Phillip Hammond warned against hurried action that would risk aggravating the protectionist Trump regime in the White House.

The next steps will be a formal legislative proposal from the European Commission early next year, while attempting to present a common position by December of this year that can then be pitched to the Organization for Economic Co-operation and Development (OECD) as a basis for a global policy platform.

My take

Europe cannot be kicked around.

So said French Minister Le Maire in a show of macho bravado clearly pitched at the home crowd back in Paris, which illustrates what’s wrong with this proposal.

It’s not necessarily the idea of taxing turnover rather than profits that’s the big problem - although the regulatory and technical complexities of this would be horrnendous enough. And that’s before non-EU countries - possibly including a post-Brexit Britain? - took advantage and offered safer tax havens. The real loser then becomes the EU if digital firms decide it’s not worth the effort and lower the importance of Europe as a market.

No, the real problem is the underlying ‘we must do something, this is something, we must do this’ mentality. It’s the need to be seen to be taking action, any action, but just action. Quick, urgent, hurry - this week’s crisis is here, let’s be seen to be doing something. We can think about the long-term implications later, OK?

The EU is correct in its assertion that existing international tax rules are not fit for purpose in a global digital economy. But the EU taking a posturing stance off its own back isn’t the solution. There needs to be a wider global consensus achieved through the G20 or the OECD.

Yes, that’s going to take a horribly long time to achieve - and it’s not likely to happen while there’s a need to Make America Great Again - but it’s the only sensible solution.