European union Member states have scrapped a Commission's plan to establish a system to tax internet giants like Google or Facebook. In a bid to break a deadlock, EU executive arm have called for a move to a qualified majority voting on tax issues. The V4 countries, however, clearly reject to kill national vetoes on tax policy. Their governments are now likely to bring in their own national digital tax laws.
By Maroš Koreň, Lukáš Hendrych, Edit Zgut, Michał Strzałkowski
During the last Tatra Summit held in Slovakia, the V4 finance ministers signed joint declaration pledging their countries to support an EU plan to tax the digital economy by the end of the 2018. According to the text, ministers consider digitalisation “one of the most significant development of the economy since the industrial revolution”. Concurrently, they stressed that the taxation of the digital economy “has not fully reflected the advantage created by the spread of technology.” All four ministers therefore expressed their support for the works towards a temporary digital tax “without prejudice to the final text of the Directive”.
This declaration referred to the European Commission’s digital services tax (DST) proposed in March 2018. Its proposal, preceded by months of debates and quarrel between Member states, should increase levies on digital services undertaxed under current EU tax rules. Under this proposal big tech giants like Facebook, Google or Apple and other large companies with total annual revenues of €750 million or above and EU taxable revenues of €50 million will have to pay a 3% levy on revenues where such money is generated. Currently, European legislation allows them to pay corporation tax in the country where the company is domiciled, which traditionally is in low- or no-income tax jurisdiction.
Although most of the EU governments agree that tax rules should be changed, they failed to reach agreement on DST despite months of talks, as smaller states with lower tax rates kept opposing the reform. The same fate has befallen the compromise proposal from France and Germany limiting the scope of the tax only to digital advertising (digital advertising tax, DAT). For any tax to be adopted at the EU level, unanimity among the 28 EU member states is required.
“It should be an easy task”
Among the V4 countries, the taxation of the digital economy has been the hottest topic in the Czech Republic. Effective tax collection is one of the priorities of the current Czech government, and therefore, question of taxation of online platforms has been on a table for a long time. Czechs also supported the Commission´s proposal in the Council. “The Czech Republic seconded a general approach on a DST directive proposal, however this possibility was rejected by ECOFIN. Although we suppose that a long-term solution on the OECD level would be the most appropriate,” the Czech Ministry of Finance says.
Also, according to Vladimír Štípek from the Confederation of Industry of the Czech Republic, the government supported European proposals in the first place. However, Confederation did not support the Commission´s proposal. “The original draft was not well prepared. That´s why we were rejecting it. There was a principle that would cause a double taxation for European companies. We also stress out an importance of transparency and auditing of personal data which are provided by digital companies about their users,” Štípek emphasizes adding that the Confederation would also prefer a solution on the OECD level.
In general, Slovakia supported the work towards digital taxation reform on EU level from the start. Bratislava advocated the application of a temporary solution unless “an ambitious, ideal and global solution of digital taxation is found,” Ministry of Finance claims. “We have been in favor of introducing a digital services tax and in order to achieve a compromise, we have also supported adoption of a digital advertising tax.”
The leader of the strongest opposition party SaS Richard Sulík, however, “sees many risks” in the introduction of DST. “It requires the harmonisation of the corporate tax base, which would open the door to the adoption of a Common Consolidated Corporate Tax Base (CCTB). Since I see this as another “salami slicing strategy” leading to gradual harmonization of tax system, I am against this proposal,” Sulík adds.
The EU digital tax was also on the agenda during Warsaw meeting between the Polish and Slovak heads of the government in April 2018. The Polish prime minister Mateusz Morawiecki expressed his wish to introduce a digital tax together with other EU countries. The two heads of the government agreed that there are many companies running business in their country while paying taxes in member states with the lowest levels of corporate tax.
"Business is taking place in the digital environment, almost without any real use of money, so it's easy to control where and from whom the profits and revenues are generated," Pellegrini explained. He added that “it is very easy” therefore to force the tech giants to pay their fair share in the country concerned.
According to Morawiecki, Poland along with France and Germany was one of the countries raising the topic of a common digital tax at meetings of the European Council. In general, however, the issue of the DST is not a hot political topic in Poland and so far has been rather limited to experts. The words of prime minister Morawiecki marked only a beginning of the discussion on the political level.
Poland, as confirmed by a vice-director of the tax system department in the Ministry of Finance Filip Majdowski, is involved in the talks about DST in both the EU and the OECD. He also pointed out that some traps will have to be avoided: double taxation and loopholes which would allow to transfer money between different branches of a company, so that it avoids taxation.
At the same time, Magdalena Piech, a regulatory expert for Allegro.pl and chairman of European Tech Alliance, which groups European digital companies, called for fair taxation to be the principle rule when introducing new fiscal burdens. In this way, for example, the revenues that are already subject to CIT (corporate income tax) should not be taxed once again. “In order to ensure fair competition among digital companies, the DST should be charged only when a company does not pay corporate tax in every country it operates in”, warned Piech.
Even though the Hungarian Minister of Finance Mihály Varga co-signed Joint Declaration of V4 Finance Ministers backing the proposal of the Commission, he presented somewhat different approach to this matter on the domestic political scene. Varga believes large digital companies can only be taxed if there is global cooperation on the matter. He thinks that until such cooperation emerges, Hungary needs to implement temporary measures. The Ministry of Finance claims that the EU presidency’s proposal concerning advertisement taxes on digital services could give impetus to the expert debate ongoing in the OECD.
Varga mentioned that Hungary, together with other V4 members, had submitted a proposal to Brussels in 2016 on levying a withholding tax on digital enterprises and establishing a joint recovery mechanism. This would have forced a tax obligation on banks and other service providers allowing for electronic payments through the turnover-based withholding tax.
V4 countries taking their own action
Since neither of the digital tax proposals received a unanimous support of EU finance chiefs, several Member states have gone ahead with their own digital taxes on internet giants. A similar step is currently being considered by the Visegrád countries.
Slovakia has been among the first EU countries to tax digital economy. In 2017, the government revised the tax legislation in order to improve tax collection from foreign digital platforms, which mediate services in transport and accommodation. The new law introduced obligation for companies such as AirBnB, Uber and Booking.com to launch so-called permanent establishments and pay 21 percent corporate tax. The government´s general objective was to ensure that local entrepreneurs paying taxes were not put in disadvantage compared to those who intentionally shift their profits to low-tax countries.
Following the introduction of the tax, the Finance Ministry announced that it would focus its attention on large digital companies in the next steps. However, Slovakia later sought to reach an agreement at EU level and has since not presented any concrete legislative proposal. When asked whether the ministry is working on its own solution after the failure of the Council negotiations, it replied that it would “analyse the options for such tax with the effect of eventual implementation in the future.”
Andrej Danko, the Slovak National Party (SNS) chairman have recently seized on this matter. At the beginning of the March, Danko announced his intent to abolish monthly licence fees for public broadcaster Radio and Television Slovakia (RTVS). Against this backdrop, in order to ‘plug a hole’ in the budget, he suggested to follow approach taken by the French government and prepare its own national digital tax.
“We need to talk about how to tax search engines and social networks,” Danko told the News Agency of the Slovak Republic (TASR).
Slovak MEP Ivan Štefanec (KDH, EPP) says he is against the introduction of any new taxes. Nevertheless, he “can imagine” setting up new mechanism that would replace the proposed levy or tax for digital companies. “However, the solution must be budget-neutral, and it must not create any new red tape or bureaucracy,” Štefanec adds.
Following the proposal failure in the Council, also the Czech Republic considers a national regulatory framework. “We intensively analyse possible ways and considering introduction of digital taxation on the national level. Next steps depend on a ruling coalition´s decisions,” Ministry says. Although there is no concrete proposal yet.
There is also another strong voice supporting the taxation in the Czech Republic. Paradoxically, it is an online platform and a search engine Seznam.cz that competes with Google on the Czech market. The reason is clear. Seznam is based in the Czech Republic and Google is not.
“We suppose that it is not sustainable to different companies doing business in the same sector pay very different taxes,” Věra Průchová from the Seznam.cz highlights. “We paid almost 24 million EUR (600 million CZK) for the VAT in 2017. On the other hand, supranational digital companies steadily pay only a few hundred thousand EUR in the Czech Republic,” Průchová adds. According to her, it is unacceptable that tax advantages and inequalities disturb competitive environment and disadvantage European companies.
Mikuláš Peksa, a vice-chairman of an opposition Pirate party, agrees. “If we want to develop our economy, we should set up fair conditions for our companies and supranational giants in the first place,” he stresses. In his view it is rational to tax corporations which have a strong market position. On the other hand, it is important to protect start-ups and SME´s that “are driving innovation”.
Confederation of Industry shares this view. “According to recent discussions and proposals, the minimum turnover limits would be quite high so the Czech companies might not be affected.”
In Hungary, the advertisement tax introduced in 2014 – which has since been amended – created a special situation. The advertisement tax must be paid after predominantly Hungarian-language ads and ads published on Hungarian-language websites. However, Google or Facebook enjoy a considerable competitive advantage over traditional actors on the market as non-taxable advertisement platforms. Gyükeri says the solution is not expanding governmental measures but annulling the advertisement tax because it is a contribution that does not have a meaningful influence on the budget.
While SMEs under a given turnover used to be in a lower corporate tax bracket, today all actors are in a single, 9% bracket. “In the past few years, Hungary has been turned into a tax paradise by the tax assessment system and low taxes, so it is no coincidence that the LuxLeaks scandal revealed the presence of the holdings of companies such as Walt Disney or Walmart in Hungary” – emphasised Gyükeri.
At the end of February, Jarosław Kaczyński, the leader of the ruling Law and Justice (PiS/ECR) party, announced the package of five social spending programmes, which constitute a part of electoral campaign promises. The total cost of the so-called “Kaczynski’s five” is said to be around 42 billion zlotys (10 billion euro).
When at the beginning of March, prime minister Mateusz Morawiecki tried to explain the source of financing these promises, he pointed to - among other things - taxation of digital giants. According to him, the new tax could bring around 1 billion zloty annually in revenues and could be applied only to the largest digital companies that operate and make profits in Poland, e.g. Google, Facebook, or Apple.
The government, however, did not disclose any details regarding the idea of introducing such a tax in Poland, much less whether it is working on the relevant bill. Warsaw is still officially involved in the works over such legislation in the EU and in the OECD. “With respect to the unilateral methods for resolving this issue, the Ministry of Finance (MoF) is currently analyzing the existing and prospective regulations in different countries. We still look for solutions at the European level and try to work out the compromise acceptable for every member state”, stated the spokesman of the MoF. Citing its sources in the MoF, “Dziennik Gazeta Prawna”, a centrist Polish daily, wrote that Morawiecki’s announcement was surprising for bureaucrats familiar with the issue and that his figures were not consulted with the Ministry. Instead, the MoF mainly analyzes the possibility of introducing digital services tax (DST), which could apply to the profits from being a commercial intermediary, or from online advertising.
V4 not ready to give up more fiscal sovereignty
The slow progress in the ongoing talks on digital taxation in the Union has also opened up broad debate about reform of the decision making on EU tax policy. It was the European Commission president Jean-Claude Juncker who, during his last state of the union speech, floated the idea that Member States should decide on certain tax matters by qualified majority. In January, the Commission published the communication suggesting a four-step plan to scrap member state veto on tax issues.
In support for this action, Commission points out that some Member States use important tax proposals as a bargaining chip against other demands they may have on completely separate files. This was, for example, the case for the Czech prime minister Andrej Babiš, who blocked an EU plan to reduce VAT rates for e-books in order to gain approval from Member states for his so-called reverse charge mechanism on EU VAT.
Still, Czech prime minister says he will not agree with extending the EU’s system of qualified majority voting in the area of taxation „as long as I am in the government “. “We definitely prefer unanimity in this field. QMV would likely weaken a role of smaller member states,” Czech Ministry of Finance adds.
Although the Visegrad countries are officially supporting expert debates on the DST proposal, they concur that avoiding restricting member states’ sovereignty to levy digital or similar taxes is an important principle.
Thus, for example, the Orbán government is trying to make it clear that its interest is taxing digital companies and distance itself from the relevant EU initiatives. This is not at all surprising in light of the fact that the Hungarian government is doing everything to hold onto its sovereignty. Viktor Orbán has said multiple times that he believes any tax harmonisation would be against the country’s interest. Mercedes Gyükeri, an economic journalist at the weekly HVG, states that the government believes the harm done by community legislation would be larger than its potential benefits. “If they give in on this, they could open further doors to tax harmonisation” – told Gyükeri to Political Capital.
She believes that the Hungarian government sees tax sovereignty as an important tool in the fight for foreign investors, albeit this can backfire specifically in the case of digital companies because they are not compensating for the lost tax revenue with any form of production activities and they are not proving their social utility either.
The Commission can neither count on Slovakia for support to its plan as the Slovak Ministry of Finance confirmed to EURACTIV.sk. However, this still seems to be the prevailing opinion among the political players, with the Slovak MEPs putting it much more bluntly.
Richard Sulík argues that veto is the most powerful policy tool allowing smaller EU countries to promote their interests, and hence, he advocates the unanimous decision making to be preserved in all areas. “Otherwise, Slovakia would pass on the future of its tax system from the hands of the Slovak government to Brussels,” Sulík warns.