France blinks, but there's still no sign of an EU Digital Services Tax deal in sight

Well that didn’t take long.

Yesterday, as European Union finance ministers gathered in Brussels under a cloud of French bluster demanding a Digital Service Tax be signed off by December, we predicted:

The tax proposal requires unanimous approval by all EU states. At present, it’s difficult to see how [French Finance Minister Bruno] Le Maire is going to get his way. The question then would be whether the French would be prepared to go their own way, something which the Macron administration would regard as antithetical to the Brussels-down approach to regulation. I suspect that the best Le Maire can hope for is an agreement that if the OECD doesn’t deliver on an International plan by a certain date - 2020 is a nice round number - then the EU will take action. That lets France save face and claim success, while not actually requiring any action. Vive la Euro-fudge!

By the close of play yesterday, that was what came to pass, with the prospect of a Europe-wide tax of 3% of EU-generated revenues, kicked into the long(ish) grass as the likes of Ireland and Denmark refused to be cajoled into accepting the French ultimatum. The tax would mostly hit US tech firms operating in Europe.

Irish Finance Minister Paschal Donohoe repeated his country’s resistance, objecting to the tax being applied in-country where consumers are located rather than where services are produced, which could mean a revenue loss for countries like Ireland:

That would hurt small, open economies. We are net exporters. What kind of reaction would we have if this model was imposed on us?

Le Maire had counted on being able to win over Germany to his side, but in the event German Finance Minister Olaf Scholz stated that any tax should not be applied until the summer of 2020, and even then only if no global deal could be reached:

We commit to transposing that [OECD recommendations] into EU law as soon as it is ready.

Scholz also nakedly put German self-interest on the table by insisting that any tax on digital services should have an exclusion built in for the auto-manufacturing industry. If that concession were to be granted, it would open the floodgates for a host of special interests concessions.

Compromise

The best that Le Maire can hope for now is that the next Ecofin meeting of finance ministers next month can be persuaded to sign off on a theoretical approval of the proposed tax with a delayed implementation date. But even that seems unlikely with the likes of Sweden’s Economy Minister Magdalena Andersson maintaining after yesterday’s meeting:

I see no government in Sweden that would have any other opinion on this issue.

But the compromise option will certainly be on the table as Austria is keen to end its six month term as EU President with a win. To that end, Austrian Finance Minister Hartwig Löger hopes that some kind of “sunset clause” that would make the directive temporary until the OECD reached a global solution will alleviate concerns among objectors.

But a more realistic outcome is that individual nation states press on with their own plans. The UK jumped the gun by announcing its intention to introduce a 2% levy from 2020, while Spain has also made public its own tax initiative. It’s believed that at least 10 more EU governments have been working on their own schemes with Italian Finance Minister Giovanni Tria explicitly stating that Italy would go it alone assuming no EU agreement is ready by the end of the year.

Multiple schemes across the EU is the kind of nightmare that Brussels dreads and which will result in a lot of Eurocrat lobbying over the next few weeks. As Austria’s Löger put it:

There is the motivation to find a harmonised solution for Europe. Even now we have 11 countries - soon it will be 12 with Spain - which have national individual solutions on digital taxation.

My take

This is the French position and this position will not move any further.

Actually it did in end, despite Le Maire’s tough-talking, but it still doesn’t look like this is going to come down in the Macron government’s favor.

The French party-line appears to be that it’s now only Ireland, Sweden and Denmark that are the blockers here, although Austria - in the chair - officially estimates that there are 10 supporters of the new tax, which suggests 18 remain opposed or undecided.

The ‘undecideds’ can be dealt with. France is counting on Germany agreeing with its plans and everyone else falling in line behind. In some cases, there’s every reason to believe that would happen. For example, the Dutch Finance Minister Wopke Hoekstra is clearly sitting on the dike on this issue:

We ultimately prefer a global solution through the OECD. We are also open to an interim solution.

But it’s a different matter when it comes to Ireland which can still scupper the whole thing by exercising its veto on the proposals. And Germany's new demand for the car industry to have an exemption opens the door to every country demanding its own special interest opt-outs.

The inclination in Brussels will be to secure a 'Euro-fudge' of kicking any implementation down the tracks. But the question will be whether opponents are ready to nod through something that they couldn’t agree with today on the assumption that the OECD will come up with something better in the next two years.

That’s putting a lot of faith in the OECD to get its act together in time or face having to go along with rules in 2020 that you've stated are unacceptable and damaging in 2018.