The European Commission has recently proposed to upend decades of international tax cooperation and introduce a new three percent tax on corporate turnover from digital advertising and online intermediation services. The proposal is not just remarkable for the actual design of the tax; it is equally notable that the digital services tax is proposed without any supporting evidence that it is in EU Member States’ economic and fiscal interest to tax digital business models differently. The proposed tax on turnover would undoubtedly have direct and indirect consequences for many firms and for economic activity, and it is neither reasonable nor credible to assume that this tax would not have enough impact on EU economies to warrant a full tax-economic impact analysis. The Commission’s own impact assessment was sharply criticised by the EU’s Regulatory Scrutiny Board. Simplistic and narrow in scope, the Commission’s assessment fails to take account of the most common consequences of business taxes and any policymaker who cares about the health of Europe’s economy should send back these proposals to the Commission and ask for a response to the following five questions: first, what is the incidence of the proposed digital services tax – that is, who will actually carry the economic burden of the tax? Second, won’t the digital services tax impact on downstream output and offline sales? Third, won’t the digital services tax particularly hurt SMEs and micro businesses and change competition between large and small firms? Fourth, won’t a digital services tax effectively become a tax on investment in the EU? And lastly, won’t this tax become a levy on innovation, economic renewal and economic convergence in the EU?
There is a campaign underway for introducing new taxes on digital services – or firms with certain digital business models. For its part, the European Commission has recently proposed to introduce an EU-wide revenue tax on advertisement and online intermediation services: the digital services tax. This tax would directly target large and highly innovative technology-driven companies like Google, Facebook, and Microsoft. But these companies are hardly the only casualties of the digital services tax. The tax would impact on those consuming digital services, particularly SMEs and micro businesses and their employees and customers. Unlike corporate income tax that applies to profits, the effect of a revenue tax would be far wider and have an impact on Member States’ economies. No tax has neutral economic effects – and certainly not taxes on revenues. Just like other taxes on corporates, firms will respond to the digital services tax and the response is dependent on their capacity to ultimately avoid bearing the cost of the taxes. Ultimately, this is a tax that would have to be paid by workers and the micro entrepreneurs that use the services. In addition, it is not a distant notion that some firms, especially those that are loss-making or operating at low-profit margins, will have to go out of business or make strategic decisions to exit particular markets that are not economically viable.
Every observer of taxes knows they have direct and indirect effects. A tax on the gross revenues of digital service suppliers would substantially impact on the overall effective tax burden, particularly the tax burden of low profitability or loss-making companies, with adverse effects on solvency and downstream companies that depend on digital services. Remarkably, the wider effects of the digital services tax have not yet been assessed by the EU. Even more remarkable, two days after the release of the legislative proposals, the EU’s own Regulatory Scrutiny Board sharply criticised the Commission for not putting forward an adequate analysis of the magnitude of the underlying problem and for not quantifying the economic costs and regulatory burdens that would result from a new tax or a new definition of the tax base (RSB 2018).
Importantly, the impact assessment by the Commission does not even provide information that is needed to assess whether digital taxes actually would have the intended effects. The Commission does not address the highly critical matter of tax incidence, i.e. who is bearing the financial burden of the digital services tax. Nor does it provide information about the impact on the behaviour of firms and individuals, which will be directly and indirectly affected, and their incentives to produce, invest and consume. Finally, the systemic implications for future economic development (dynamic, i.e. medium to long-term, effects) and the prospects for economic renewal and convergence in the EU are entirely neglected despite the fact that the tax aims to target companies that represent a substantial part of innovation in Europe’s economy.
This paper will raise the questions that policymakers will have to respond to if they insist on the merits of the proposed digital services tax. Section 2 will outline the major features of the European Commission’s proposals and look at the broader policy narrative for why the Commission and some Member State governments want to take particular action against so-called digital firms. Section 3 outlines what the Commission has to do now to allay concerns that the digital tax proposal is a pure political product with few linkages to serious tax analysis. Section 4 concludes the paper.
 On 21 March 2018, the Commission proposed a special tax on certain digital services and presented it as a tax on large “digital” companies (European Commission 2018a; 2018b).
 Due to its applicable thresholds for turnovers, the taxes proposed by the European Commission would almost exclusively affect the revenues of companies that are currently headquartered in the US, namely those providing digital advertising and online intermediation services, e.g. Google, Amazon, Facebook, Uber, AirBnb – companies which have been explicitly outlined in the European Commission’s “Draft Justification for EU Action” from 26 February 2018. Based on the design, architecture and revealing structure of the Commission’s proposal, the US government is likely to come to the conclusion that the measures constitute a disguised restriction on international trade. And indeed, the US government already signalled to challenge the European Commission’s proposals for a new EU-wide digital tax, warning to take the Commission’s plans to a tribunal of the WTO (Handelsblatt Global 2018; FAZ 2018).