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?
The EU’s Proposal for Taxes on Revenues from Certain Digital Services
The European Commission has set out its ambition for digital taxation in two new proposals. The first proposal is about so-called “digital presence” or “virtual permanent establishment”, which is the Commission’s preferred long-term legislation. It is based on the assumption that “digital” businesses should be taxed where they have significant interaction with users “through digital channels”. In practice, the proposal aims to tax so-called digital platforms (two-sided markets), thus enabling EU governments to tax profits that are “generated” in their territory even if businesses do not have a physical presence there. The right to tax would only apply to digital platforms that meet at least one of the following criteria: 1) it exceeds a threshold of seven million EUR in annual revenues in a Member State, 2) it has more than 100,000 users in a Member State in a taxable year, and 3) over 3,000 business contracts for digital services are created between the company and business users in a taxable year.
Even though the Commission explicitly acknowledges global efforts within the G20 and the OECD to reform current principles and treaties on corporate income tax, it still proposes an interim tax on “certain revenues” from digital services that “escape the current tax framework entirely”. Accordingly, the second proposal suggests a tax on “revenues created from activities where users play a major role in value creation”. This tax would be imposed on 1) revenues from selling online advertising space, 2) revenues from digital intermediary activities, which allow users to interact with other users and which can facilitate the sale of goods and services between them, and 3) revenues created from the sale of data generated from user-provided information. A tax of three percent is envisaged for companies with total annual worldwide revenues of 750 million EUR and intra-EU revenues of 50 million EUR. Tax revenues would be collected by the Member States where the users are located.
This tax initiative reflects the conclusions of the European Council of December 2017 and the preference of some governments to introduce a digital tax. Before that summit, ten EU Finance Ministers co-signed a joint political statement in favour of “a so-called ‘equalisation tax’ on the turnover generated in Europe by the digital companies.” The Council, however, did not provide any suggestions for the actual design of a digital tax or the defining characteristics of a digital corporation. Aware of national obligations in international tax agreements, the Council rather demanded 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).
 Following the Directive’s applicable definitions, advertising services are “services consisting in the placing on a digital interface of advertising targeted at users of that interface; as well as the transmission of data collected about users which has been generated from such users’ activities on digital interfaces. Online intermediation services are “services consisting in the making available of multi-sided digital interfaces to users, which may also be referred to as “intermediation services”, which allow users to find other users and to interact with them, and which may also facilitate the provision of underlying supplies of goods or services directly between users.”