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Moody's stirs the pot on UK Digital Services Tax plan as EU ministers meet to bake up a Euro-fudge

Stuart Lauchlan Profile picture for user slauchlan November 5, 2018
Moody's has a warning for US tech firms, while the French are getting impatient in Brussels.

The UK’s go-it-alone Digital Services Tax continues to cause international ripples with credit rating agency Moody’s stirring the pot yesterday on the eve of a meeting of European Union finance ministers to argue about a Europe-wide digital tax.

The UK Chancellor of the Exchequer last week used his annual budget statement to announce that Britain was tired of waiting for International consensus on taxing digital services providers to emerge from the OECD (Organisation for Economic Cooperation and Development) and as such would be rolling out a UK-only scheme.

With US politicians and industry lobbyists already warning of retaliatory action if the UK tax comes into force in 2020, Moody’s has warned that it would impact the cash flow of the tech industry and reduce the benefits of the Trump administration’s corporate tax cuts. This would result in a “credit negative” situation for the likes of Facebook and Amazon, who’d be hit by a 2% tax on UK-generated revenues.

Moody’s senior vice-president Neil Begley reckons that “Alphabet and Facebook appear to be the primary targets of the tax,” but warns that the likes of Amazon and Uber are also in the line of fire:

The implementation of such a tax would be credit negative for these and other digital information companies because it would reduce free cash flow generation and scale back the tax benefits achieved through the US Tax Cuts and Jobs Act of 2017.

While the UK tax proposal will not prevent companies like Alphabet and Facebook from continuing to collect the data needed to offer advertising, it nonetheless represents [a] new cost to run the business. If they cannot pass through this potential cost increase to customers, it will reduce free cash flow in future years.

Moody’s goes on to warn that if the UK tax comes into force, it’s likely to encourage other nations to adopt their own unilateral digital tax regimes, which in would create a snowball effect on US tech firms operating internationally:

If the UK is successful in enacting a digital services tax, it might encourage other countries in Europe or the Asia-Pacific region to impose similar taxes of their own. Given that these regional markets are far larger than the UK alone, this could have a significant effect on how Alphabet and Facebook view their business models. Within the European Union, there have been reports that 11 of 28 member states are already considering their own digital services taxes if a common agreement cannot be reached.

France stamps its foot

Such common agreement still looks a long way off despite ‘foot stamping’ comments from French Finance Minister Bruno Le Maire this morning as he entered a meeting of his counterparts in Brussels. France has been the most aggressive advocate of an EU digital tax and Le Maire was talking tough today, warning that:

Let's be clear - this is the red line for France, there must be the adoption of a directive on digital taxation by the end of this year!

Tell that to the Irish or the Danish governments. Or indeed the Germans, who are very sceptical of the proposed 3% levy on the European sales of companies with a global annual revenue of €750 million or more.

Le Maire has at least acknowledged that there’s considerable opposition to his plans:

We are aware there are some technical issues and technical concerns, but these are technical concerns not political problems, so we still have three or four weeks before the next Ecofin [finance meeting]. I will spend day and night with my German friends to find a compromise and to find a solution on those technical issues.

The problem for Le Maire is going to be if he assumes, as he appears to, that so long as he can secure German endorsement, everyone else will fall into line. That’s clearly far from the case. Danish Finance Minister Kristian Jensen said this morning:

Anything is possible in politics, but I think it is very difficult to see an agreement on the digital service tax.

And he raised the fear that the Trump White House isn’t just going to sit back and let US firms be hit by a new tax from the EU, which is regarded by the President as an enemy of America. Jensen noted:

Of course there will be a reaction from the United States.

For the French government, a bit of anti-American sabre-rattling may be seen as a potential vote winner. Other nations are less gung-ho, particularly Ireland which has put a great deal of effort into attracting US tech inward investment. Irish Finance Minister Paschal Donohoe has made his opposition to the French push quite clear:

I believe that tax changes that shift the incidence of tax to markets in which the service or good is consumed are difficult for the European Union overall, as an exporting economy. I think the European Union should take great care in putting in place a measure that shifts the tax point to where the good or service is sold. At the moment the tax model is designed on the basis of where value is created.

My take

The belligerent tone struck by the French today is indicative of awareness that the window of opportunity is closing fast on this topic. The EU Presidency is currently held by Austria, which is supportive of the French demands for action, but that status ends in December when Romania takes over for the first half of 2019. The tax proposal requires unanimous approval by all EU states. At present, it’s difficult to see how 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 this year 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!

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