EU Digital Tax Proposal Endangers EU-U.S. Trade Relations

This is the first in a series on tensions in the Transatlantic digital trade relationship, and how to resolve them.  Germany, and other EU states, increasingly worry that a controversial EU digital tax proposal could lead to U.S. trade retaliation.  The next post, on proposed new copyright regulations, is available here.

Tomorrow, EU Trade Commissioner Cecilia Malmström will meet with U.S. Trade Representative Robert Lighthizer to advance transatlantic trade talks.  For the EU, the main mission is to avoid looming U.S. tariffs on European car exports. U.S. tariffs could lead to a tit-for-tat, risking escalation into transatlantic trade war.

Curiously, the EU is simultaneously about to decide whether to introduce a special digital turnover tax which has been called a “de facto tariff.”

The European Commission has repeatedly denied that its proposed Digital Services Tax (DST) is aimed at U.S tech companies.  However, a Commission internal document shows that all but one of the targeted companies are American.  It only mentions one non-EU country, the United States, and the document openly concedes there are questions regarding whether it would “be consistent with the EU’s WTO obligations”.

The taxed business models (online search, social media, online marketplaces and online intermediation services) all happen to be activities where U.S. companies excel and European companies lag behind.

The European Commission justifies its digital tax by stating that “digitalised business models are subject to an effective tax rate of only 9% … Less than half compared to traditional business models.”  As explained in a previous DisCo post, industry data reveals that digital companies actually pay a higher tax rate than traditional companies.  Moreover, U.S. companies are already subject to a minimum tax on their overseas earnings under the U.S. tax reform.

Some innovative and export-oriented EU Member States are concerned that the DST could harm Europe’s digital transformation.  They also worry about possible U.S. retaliation.  Last week Germany’s Council of Experts warned that the proposed EU Digital Services Tax could be interpreted as a “unilateral EU tariff against the United States [which] could send negative impulses in the trade dispute with the United States.”  

Senators Hatch and Wyden have warned that the EU DST “has been designed to discriminate against U.S. companies and undermine the international tax system, creating a significant new transatlantic trade barrier.”  U.S. Treasury Secretary Mnuchin has also warned against European “unilateral action” and instead urged the EU to help advance international tax reform through the OECD/G20 process.

As the EU digital tax negotiations are about to conclude, its proponents have turned up their anti-U.S. tech rhetoric.  The French Minister of Finance now openly calls it a ‘“GAFA tax” — referring to the acronym used for tech giants Google, Amazon, Facebook and Apple.  He has also reiterated, in a November 6 meeting with his European counterparts, that it had been ensured that European manufacturers would not be targeted by the tax.

Finance Minister Le Maire is now arguing that the EU should become an “empire” in order to stand up to China and the United States, stating that “[e]verybody knows it takes guts to stand in the way of Donald Trump’s administration.”

The governments of Germany and other EU states are understandably uncomfortable with the French “demonisation” of U.S. tech giants.  The EU digital tax would raise a relatively meager €1,8bn to €4,7bn that would be divided between the EU Member States.  Yet it would jeopardize the EU’s most important trading relationship, which is worth $5.5 trillion, and supports some 15 million jobs.

If the EU wishes to pursue a constructive trade relationship with the United States, it may want to reconsider its “GAFA tax”.