This report, prepared by Julian Jessop (Institute of Economic Affairs), Massimiliano Trovato (Istituto Bruno Leoni), Nicolas Marques (Institut Économique Molinari), Javier Santacruz (Civismo), is a critical assessment of the EU’s plans for digital billing.
Given the proposal of the European Commission for a new set of taxes on the activity of digital companies, this study explains why it would be disproportionate, discriminatory and harmful to the European economy. These taxes are based on the idea that global technology companies are not paying a “fair percentage” of taxes. Other reasons refer to the behaviour of these companies —abuse of use of personal data or propagation of fake news).
Both economists and tax experts agree that corporate taxes are inefficient to increase state revenues, since many corporations are established in low tax jurisdictions.
It is believed that, by increasing the tax burden, the charges on others will decrease. The reality is that it leads to less work, lower wages and higher prices, having regressive effects. Some believe that the solution is to tax billing instead of profits, as it is a fairly transparent tax. This is wrong insofar as:
(i) It directly taxes economic activity, increasing unproductive costs.
(ii) It is more likely to charge consumers, similar to VAT.
(iii) They are a brake on investment, while in profits one can deduct costs.
(iv) These taxes have a high tax effect and would reduce profits by half.
Since 2018, the EU seeks that these activities pay “in a fair and friendly way to growth”, believing that there is disconnection between where value is created and where it is taxed. They propose to reform the tax rules to tax businesses in which there is a lot of interaction with users by digital means. This being a long-term plan, they propose as an “interim tax” not on profits, but on income. This could violate the principle of national treatment of Article XVII of the GATS, as it would discriminate against US suppliers, leading to actions before the WTO and complicating negotiations between the US and the EU in the future. Meanwhile, some countries have taken the initiative in this area.
France: They propose the “GAFA” tax (Google, Apple, Facebook, Amazon) on income from the sale of data in personalized propaganda. It would apply to companies with a worldwide turnover exceeding 750 million euros and 25 million euros in France.
United Kingdom: They work on a “Digital Services Tax”, so that these companies pay taxes for the value obtained from British users. It would be a 2 percent tax on the income of specific digital business models (search engines, social networks). From the government they do not consider it practical or profitable.
Italy: After several attempts, the so-called “Web Tax”, in its 2018 version, applies to companies that invoice more than 750 million euros globally and 5.5 million euros for services provided in Italy, for the propaganda online and user data transmission. It is 3 percent on gross income. It can result in double taxation.
Spain: Currently there is the Draft Law for the “Tax for Certain Digital Services”: online propaganda services, online intermediation services and sale of information provided by the user. It is delayed for the election year.
It will be applied to companies whose net turnover for the previous year exceeds 750 million euros, and whose income from services taxed by the tax in Spain exceeds 3 million euros in the previous year. It would be 3 percent and annual revenues of 1,200 million euros are anticipated.
Its economic impact has been studied by PwC, who believes that the cost of the tax will be borne mostly by consumers and small companies that use these services, with losses for Spanish GDP between 586 and 662 million euros.
Javier Santacruz’s analysis for Civism throws the following conclusions:
(1) The margins of the national digital industry would be reduced by 178 million euros per year.
(2) Two percentage points would be subtracted from the profitability of annual sales.
(3) The consumer would assume a third of the costs; and intermediaries, two thirds, with SMEs being the most affected.
(4) The loss of profitability will lead to a 0.5 percent reduction in sector investment.
(5) It would have an impact of 0.474 euros per capita on consumers for each digital product taxed, mostly online transactions and data exchange.
It can be said that it is an extremely complex issue, motivated more by politics than by economic rationality. National attempts to tax the digital sector will further entangle the tax system, creating uncertainty in the future. Likewise, not only is there no evidence on the supposed low taxation of the sector, but the users of these companies obtain enormous benefits. And these being the engine of development and economic innovation, its discriminatory assessment is even more unjustified.