The European Commission announced this week that it has sidelined ambitious plans for an EU-wide digital tax, following an agreement between G20 Finance ministers that will pave the way for a minimum global cooperate tax rate of 15 percent, likely to impact some of the world’s largest tech firms.
“After many years of discussions and building on the progress made last year, we have achieved a historic agreement on a more stable and fairer international tax architecture,” a joint statement from the G20 read after the summit in Venice last weekend.
The agreement effectively marked the postponement of the EU’s own plans, which had been due to be presented on July 20. Brussels was charting plans for a 0.3% tax on the sale of online goods and services on companies with an annual turnover of at least €50 million. The EU Commission suggested this levy could help to subsidize the bloc’s €750 billion recovery fund, potentially contributing up to €1.3 billion annually.
However, following a visit from US Trade Secretary Janet L. Yellen in Brussels earlier this week, the Commission said that their plans had been put on the back burner, and that they welcomed the 15% levy endorsed by the G20 and backed by 132 nations taking part in talks as part of the Organisation for Economic Co-operation and Development (OECD).
The EU’s Economy Commissioner Paolo Gentiloni called the move a victory “for tax fairness, for social justice and for the multilateral system.”
During her visit, Yellen also sat down with Irish Finance Minister Paschal Donohoe, who chairs the Eurogroup, and has long opposed the idea of a levy that may impact his country’s attractive cooperate tax regime. “This an agreement that is historic and very much in the interest of all countries, and it's important that everyone try to get on board," Yellen said after the meeting.
She also attempted to allay concerns on a global tax deal emanating from Estonia, which houses a vibrant tech startup ecosystem. Following talks with the country’s President and Finance Minister, Yellen said that her "sense is that those countries want to find a way to get to 'yes'.”
Supporters of a bolstered global cooperate tax regime have in the past rued opposition both from within Europe and further afield. Under the Biden administration, the US forwarded a proposal in early June, which brought negotiating delegations within the OECD closer together. This was something Former President Donald Trump was unable to achieve, having pitched various conditions to a global tax regime, including the option for certain parties to opt out of the new system.
European divergences on digital taxation
Due to the US’s previous reluctance to chart progress on talks in the OECD, certain nations in Europe had decided to construct their own tax architectures for the digital economy, including in the UK, Spain, France, Austria, Italy, Hungary and Poland. Proposals had also emerged from Belgium, the Czech Republic and Slovakia.
However, the divergences across the goods and services covered as part of these regimes, as well as the tax rates themselves, had long been a cause of frustration for those in the industry.
Such variances can be seen in the measures implemented by the above European countries, including in Hungary, which has adopted a temporary 7.5% levy on online advertising revenue for companies with a global annual revenue of 100 million Hungarian forints, a framework that contrasts with France’s 3% tax across advertising services based on user data as well as sales made through digital interfaces, applied to companies with a global revenue of €750 million, and a domestic revenue of €25 million.
As a result, those in the tech industry were feeling increasingly burdened by emerging compliance obligations with various tax jurisdictions, and therefore had been backing an international deal that would harmonise rates.
An international deal preferable for startups
While the EU’s attempts to establish their own digital tax framework were well intentioned and preferable to a fractured landscape across EU member states, the goal was always to find a global solution. This has been a consistent position adopted by those in the startup community as well as larger tech firms.
Brussels-based association Allied for Startups participated in a public consultation launched earlier this year by the Commission to gauge appetite for the EU’s digital tax plans. For them, concerns were unambiguous about how such a levy could impact the bloc’s startup community.
“The implementation of a new digital levy targeting bigger players also impacts their smallest economic partners,” their submission read, highlighting data that suggests the additional “costs for big multinational digital companies will be passed on to SMEs and startups.”
Meanwhile, the App Association, representing global app developers, said that the many ‘micro-multinationals’ they count as members “face a diverse array of challenges when entering new markets,” and such would only be exasperated by the establishment of an EU-wide tax while there was still the possibility of forming an international framework.
This was a similar line highlighted by SMEUnited, who noted that their members generally don’t have the resources to “exploit different regimes for tax planning and are confronted with high compliance costs and higher effective tax rates.”
For those working across worldwide tech industries, an international agreement such as the one charted by the G20 last week, represents the fairest approach to the conundrum of bridging the loopholes of a global, digital economy.
G20 in October
The finer details of the new regime are still to be hashed out, ahead of a meeting between G20 leaders in Rome in October. When the specificities of the new system are agreed, it will have a significant impact on the digital economy. In Europe, it may have a bearing on where certain firms choose to base their headquarters. Nations such as Ireland and Luxembourg, with their attractively low tax rates, have traditionally been the locations of choice for large tech firms operating across the EU.
The EU executive has previously attempted to adopt a reformed tax framework that would help to address some of the challenges of a global economy. 2019 plans would have seen a 3% levy on companies earning €750 million in revenue, €50 million being EU taxable revenue.
However, securing unanimous agreement between EU member states, a prerequisite for adopting tax reform in the EU, proved too challenging with nations such as Ireland, Finland and Sweden standing against the plans.
And opposition to an international deal from several countries in Europe including Ireland, Estonia and Hungary, is not likely to go away anytime soon. Speaking to Irish media on Thursday, Finance Minister Pascal Donohoe struck a cautious tone, noting that Ireland could not agree with the deal at the OECD as it currently stands. Donohoe noted that he would prefer to see the rate lowered to match Ireland’s cooperate tax rate of 12.5%.
However, with a US administration more resolved to reform taxation for a global economy, October’s G20 talks may very well yield a positive outcome.
Featured image credit: Andrei Carina / Unsplash