Prof. Luc De Broe (KU Leuven

European taxes on tech giants and multinationals still a while off

Europe seeks to strengthen its budgetary resources with taxes on multinationals. But the European architecture is full of obstacles.

In recent months, European heads of government and the European Parliament have reached a political agreement on a multi-annual European budget of EUR1,090 billion. On top of this, the EU can borrow EUR 750 billion on the financial markets to cushion the economic impact of the Covid-19 crisis and make the funds available to Member States in the form of loans.

By Prof. Luc De Broe (KU Leuven)

According to the Treaty on the EU, the European budget is financed entirely from “own resources”. The concept of the EU’s own resources is misleading. After all, more than 80% of it comes from a percentage of the gross domestic product (GDP) of the Member States and from the VAT collected by the Member States. These EU own resources are no longer sufficient to meet the EU’s ambitions and meet its commitments under the Covid-19 loans.

The agreement therefore provides for new “own resources”: environmental taxes (such as a tax on nonrecyclable plastic and a carbon dioxide import tax), and new turnover and profit taxes, including a tax on digital services and on the profits of multinationals. The intention is clear: it is not the average EU citizen who pays for the cost of the EU Green Deal and the Covid-19 recovery plan, but rather non-European polluters, US tech giants, and multinationals operating in the European market.

The agreement requires double unanimity. It must be approved unanimously by the European Council and then ratified by the parliaments of all the Member States. Because the agreement makes the payment of funds to the Member States conditional on respect for the rule of law, Hungary and Poland initially were opposed to it. But even after the EU took that hurdle, it is uncertain that the proposed taxes will convert into “own resources” any time soon.

It so happens that the EU cannot levy taxes in the current state of the EU treaties, so European taxes do not exist. If the EU wants to see taxes flow in as “own resources”, it must count on the Member States to be prepared to concede to it some of their taxes. Ideally, these should be national taxes harmonised within the EU - as is currently the case with VAT - and falling within a European competence, such as the environment or the internal market. Once again, such harmonisation requires the unilateral approval of all Member States.

The tax on digital services referred to in the agreement does not necessarily include the harmonised 3% tax on the revenue of digitech giants in the draft European Directive of 2018 (the DST, digital services tax). The Commission remains in favour of the solution the OECD is working on at a global level. However, this solution will not be published until the summer of 2021. Under this OECD proposal, part of the profits of digital service providers (such as Facebook and Google) and of so-called “consumer facing businesses” (both online and traditional sales of goods) will be taxed in the country of the consumer, even if the business is not physically established there.

Prof. Luc De Broe (KU Leuven)

To me, such a tax does not seem to be a good candidate for the EU’s “own resources”. After all, the revenues are allocated to the country of the consumer, not under European harmonisation legislation but under a new rule of international treaty law. And why should the Member States be prepared to hand over this additional tax revenue to the EU at a time when they need it themselves to cover their own Covid-19 deficits?

If the EU wants to make a harmonised DST an “own resource”, it will have to get all Member States to accept its 2018 proposal. Luxembourg (the European headquarters of Amazon), Ireland (Google) and Sweden (Spotify) oppose. The DSTs almost only affect US tech companies. Member States that have already introduced a DST independently of the EU proposal - such as France - have been subject to retaliation by the US in the form of levies on imports of their products into the US. It seems unlikely that the other Member States would want to enter into a trade war with the US because of a tax they would have to hand over to the EU. What’s more, the revenues of a DST should not be overestimated. The original estimate of EUR 5 billion a year for the EU as a whole has recently been revised to EUR 1.3 billion: a drop in the ocean that is the EU budget.

If it wants to make corporate income tax on multinationals an “own resource”, the EU must first harmonise it. Its proposal for a “Common Consolidated Corporate Tax Base” (CCCTB in jargon) dates back to 2011 and aims to redistribute the profits of large multinational groups to the Member States on the basis of a number of parameters. These work to the detriment of small non-industrialised Member States, so unanimous support for the proposal remains an illusion as long as it is not fundamentally re-examined.

I can hear you say: we should switch to qualified majority voting for taxation in the EU. All very well, but that requires unanimity in all national parliaments and then in the European Council.