Over the last several years digital taxes have been the star of tax policy debates. With the upcoming economic challenges arising due to the COVID-19 pandemic, governments around the world are looking for new sources of income to make up for their slimming budgets. The EU is no exception. The digital economy, and reshaping the ways in which it is required to contribute to the recovery is seen as one of the best potential avenues for new sources. Germany, which is currently presiding over the work of the Council of the European Union, will have a tough task to oversee the developments on digital taxation and help Member States coordinate their positions on numerous fronts – international, European and national.
Firstly, the international negotiations led by the Organization for Economic Co-operation and Development (OECD) have been ongoing for a few years and are now divided into two so-called pillars. Pillar I deals with finding new ways to tax the digitalizing economy and is officially called the “Unified Approach”, while Pillar II looks into the remaining challenges and loopholes for tax base erosion and questions the need for a global minimum rate for income tax. While the negotiations on Pillar II have been progressing relatively smoothly, Pillar I is more politically sensitive and challenging.
On 17 June, US Treasury Secretary, Steven Mnuchin, sent letters to multiple countries suggesting delaying the Pillar I negotiations on digital tax. While the political significance of these letters is high, the language and key arguments showcase a slightly less alarming situation than reported by media. The US is not completely withdrawing from the negotiations and is still expressing its willingness to reach an agreement on Pillar 1 later this year. However, the US insists the negotiations need to pause as it is not a suitable time to pursue negotiations due to the COVID-19 crisis. In their response, Italy, France, the UK and Spain reminded the US that it has now been seven years since the OECD and the G20 identified a need to address the tax challenges raised by the digital economy. According to them, the pandemic has accelerated a fundamental transformation in consumption habits and increased the use of digital services, only increasing the need for a global solution on digital taxation.
Following this exchange, the OECD has continued technical work on the Unified Approach for Digital Taxation. During an exchange of views with the European Parliament on 13 July, Saint-Amans, Director of the Centre for Tax Policy and Administration at the OECD, was positive about the progress the OECD is making on a technical level, saying that the blueprints for both Pillars of the OECD negotiations will be ready for October 2020. However, the ongoing COVID-19 pandemic, Secretary Mnuchin’s letters to various European countries, and the US re-igniting sanctions on France over their national digital services tax have all slowed down negotiations on a political level where the key decisions over the future digital tax structure will need to be resolved.
Secondly, the EU is committed to proceed with introducing digital taxes with or without an international agreement as early as next year. The EU would either simply implement the OECD agreement into its laws or build on the technical negotiations that happened at the international level and propose a European law. However, the most recent developments in response to the COVID-19 crisis and a need for more income coming into the European budget led the European leaders to suggest a digital levy. The European Council Conclusions after 17- 21 July 2020 meeting suggest that as part of the ‘own resources’ of the Multiannual Financial Framework (MFF), the EU will propose, in the first semester of 2021, a digital levy which would apply as of 1 January 2023. No further details are available about the structure of a levy or how it would interact with the future digital taxes. Given it is called a levy, it would most likely be structured as a fee that an entity must pay to the EU for the right to exercise business in the jurisdiction, rather than a fee linked to the performance of the business, as the latter would look more like a tax and could potentially trigger jurisdictional tax disputes. However, the details will only become clear once the proposal for the digital levy comes out in 2021.
Finally, multiple EU countries have decided to move unilaterally and have introduced national digital services taxes (DST) (usually based on turnover of a certain amount of digital activities). The last one in line is Spain, which is expected to finalize its national DST after the summer break and introduce the measure as of 2021. For international businesses, such a patchwork of national measures creates compliance hurdles and is a significant burden. It remains to be seen how likely it is for such taxes to be phased out if an international or European digital tax get approved, especially if the latter were to bring lower income to national budgets.
Whether or not an international agreement on digital taxation is still possible before the end of 2020 is uncertain and will depend on multiple factors, including the US presidential elections, the COVID-19 crisis and its economic fallout. In any case, Germany will have a big role to play, both at coordinating the EU positions and being a leading voice at the OECD. In her waning days, German Chancellor, Angela Merkel, appears to be acutely aware of her responsibility and her legacy and is doing whatever she can to strengthen the EU’s cohesion. Germany itself, however, remains a rather lukewarm supporter of an only EU-wide deal and still prefers a solution at the OECD level. In any case, it is clear that businesses throughout the world need to keep a close eye on the digital tax discussions and be ready to act.
Senior Director, Tax policy team lead , Strategic Communications – Brussels
Director, Strategic Communications – Berlin
The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.