Some (large) EU governments are making the case for digital companies to pay “their fair share of tax”. The key underlying assumption is that companies in the digital space are not doing so right now. Governments also assume that there is a substantial source of untaxed profits that is waiting for the embrace of the taxman. The European Commission is now considering “revenue taxes” on those companies that under some definition can be called “digital corporations”. In this paper, we provide a critical assessment of the underlying reasoning of the European Commission and those EU governments that currently are in favour of targeted taxes on digital revenues.
There is indeed a good case to make for fair taxation and that uneven effective tax rates can distort competition and lead to smaller tax revenues. However, those that are calling for higher taxes on one particular group of firms – digital corporations – have yet to present the evidence for why that is motivated by principles of fair taxation. The European Commission’s “hypothetical” estimates for effective corporate tax rates (ECTRs) do not reflect the high effective corporate tax rates of most corporations that operate in the EU and outside EU Member States, including the world’s largest digital enterprises.
In addition, the European Commission’s selective focus on digital companies that are big on “stock markets” mixes up market capitalization with corporate income. Thereby, the focus on the world’s “top 100 companies by market capitalisation” and the world’s “top 5 e-commerce companies” hardly reflects the reality of the digital economy and profit levels among different, often highly diverse, firms. Real world financial data show that the average corporate tax rates of many digital companies actually exceed the European Commission’s “hypothetical” estimates by about 20 to 50 percentage points.
Ideas to slap a targeted tax on digital revenues clash with the EU’s top policy priorities for the digital economy. It is therefore remarkable that such taxes even are considered. A tax on digital revenues would not only stand in opposition to tax efficiency and neutrality; it would also undermine digitalisation, European integration, and the Digital Single Market.
Research assistance by Nicolas Botton is gratefully acknowledged.
Some governments in Europe are making the case for digital companies to pay “their fair share of tax”. Obviously, the key underlying assumption is that companies in the digital space are not doing so right now, and that there is a substantial source of untaxed profits that is waiting for the embrace of the taxman. The European Commission has also weighed in and, flanked by a few powerful EU governments, is now considering a new revenue tax on companies that under some definition can be called “digital corporations”. (European Commission 2017a)
It is difficult to make sense of this debate – and the actual proposals. For starters, the European Commission does not specify what makes a company digital, let alone where to draw a line between more digital, less digital or non-digital business models. Moreover, it remained open what exactly falls within the scope of a tax on digital revenues. Indeed, the OECD’s digital economy group, who looked at this same issue for more than 2 years, concluded that it was in fact impossible to put a fence around the “digital economy” (OECD 2015; 2014). Given that digitisation is a feature of all industries and that many non-digital sectors now feature digital business models, decisions about what firms that would deserve the special embrace by tax authorities would inevitably be arbitrary and become a source of significant competitive distortions.
Other EU bodies have thrown their weight behind new proposals for taxing digital firms (e.g. the European Council of December 2017) and (only) 10 EU Finance Ministers, who have co-signed a joint political statement in favour of “a so-called ‘equalisation tax’ on the turnover generated in Europe by the digital companies.” Like the authors of the European Commission’s official Communication, the Council does not provide any additional clarity regarding the defining characteristics of a digital corporation, let alone the tax bases taken into consideration. Aware of national obligations from international tax agreements, the Council demands, however, that an “equalisation levy based on revenues from digital activities in the EU” should “remain outside the scope of double tax conventions concluded by Member States.” (European Council 2017 pp. 1)
In this paper, we will assess these ambiguous ideas in the context of real observable data for less or non-digital companies on the one hand and digital corporations on the other. In Section 2, we provide a critical assessment of the underlying reasoning of the European Commission and those EU governments that currently are in favour of targeted taxes on digital revenues and establishment requirements. In Section 3, we outline prevailing myths and misconceptions about digital/online firms and their actual situation regarding profit margins and tax expenses, and we compare them with the same observed data for companies that operate in more traditional sectors. This part of the paper will largely focus on the underlying assumption that there are huge reserves of untapped or untaxed profits. Section 4 summarises the results and concludes.
 DG TAXUD: Directorate-General for Taxation and Customs Union. In September 2017, the Finance Ministers of France, Germany, Italy and Spain announced that ‘[w]e should no longer accept that these [digital economy] companies do business in Europe while paying minimal amounts of tax to our treasuries. Economic efficiency is at stake, as well as tax fairness and sovereignty.’ They further ‘ask the EU Commission to explore EU law compatible options and propose any effective solutions based on the concept of establishing a so-called “equalisation tax” on the turnover generated in Europe by the digital companies.’ See Eurogroup 2017.
 OECD (2015, p. 11) comes to the conclusion that “[b]ecause the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes.” OECD (2014, p. 24) argues that “[a]ttempting to isolate the digital economy as a separate sector would inevitably require arbitrary lines to be drawn between what is digital and what is not.”