Politicians on the continent have worried for years about the tax planning of these (usually American) super‐firms.
Last week, they issued a proposal to deal with the perceived problem: allow individual countries to tax the local revenues of these giants at a three per cent rate.
The aim? To compensate for the fact that, according to the EU, digital firms pay an effective corporate tax rate of 9.5 per cent, compared to the 23.3 per cent faced by “bricks and mortar” firms.
Developing a whole new tax base (revenues rather than profit) for a relatively small number of companies seems a dramatic — and arbitrary — course of action. And it throws up all sorts of problems, some of which require further carve‐outs and convolutions of the tax system.
For starters, new, upcoming digital companies going global for the first time would now have to navigate and structure their businesses according to two completely different types of tax base, beyond the ordinary compliance costs of operating across countries.
This would be particularly harmful to small companies. Little surprise then that the EU has introduced a threshold: companies would have to have revenues of $750m worldwide and $50m in the EU to fall under the regime.
But that’s just the half of the potential distortions. A revenue tax creates a liability irrespective of whether the business is making a profit or loss, heightening the possibility of business failures.
In fact, it would be particularly destructive to digital businesses with very high turnover but low margins, which is often the case when firms are expanding and trying to build big networks.