France and Germany are the two major European economies right now. These are the countries that are driving the European Union as the rest of the members of the EU are under severe financial duress. It would be fair to assume that these two countries have considerable clout in the European Union. Hence, if they decide to implement some kind of policy change it is almost a done deal.

This is the reason why Germany and France’s support for the introduction of a digital tax has sent shivers up the spine of many multinational corporations.

In this article, we will have a closer look at the proposed digital tax and the impact that it will have on the wider economy in Europe.

The Background

German Chancellor Angela Merkel has publicly stated that Germany will discuss the digital tax in the next European Union meeting in Brussels. She clarified that the digital tax will indeed be implemented in Europe very soon. It was not a question of whether it would be implemented, that is a foregone conclusion. The real question is how the tax should be implemented.

Countries like Ireland, Sweden and Denmark are against the proposal. However, Germany is hopeful that these countries will be convinced soon. If the digital tax is indeed implemented, there will be a 3% tax on the revenue of digital sales. These taxes will be liable to be paid in the jurisdiction of the consumer as opposed to the jurisdiction of the vendor.

Let’s have a closer look at the pros and cons related to this proposal.

The Pros

Germany and France are seeing some major benefits that can be reaped by implementing this new tax. Some of them are as follows:

• Debt Repayment: It is no secret that most of Europe’s economies are drowning in debt. The governments is most of these nations are in dire need of more revenue. It is the lack of this revenue that is causing these governments to impose austerity measures on their people. Some of these austerity measures are really hurting the economy. Since the financial situation is so tight, these nations could benefit from some additional revenue. The quantum of internet sales is increasing rapidly. Hence, this new source of revenue will provide significant relief to the cash-strapped governments. Countries like Italy and France have been complaining that global tech giants make money by selling to their consumers. However, then they shift their offices to a country where tax rates are lower. The end result is that these countries lose billions of Euros worth of tax revenue.
• Only Affects Large Companies: Secondly, it also needs to be understood that the digital tax in Europe will only be levied on large companies. Companies which exceed a certain turnover will be the only ones being taxed. The smaller entrepreneurs who are starting a business online will not have to pay this tax. The European lawmakers are of the opinion that the Facebooks and the Amazons aren’t paying enough taxes. These measures are meant to them cough up their fair share.
• Protect Jobs: Lastly, many European countries believe that the tax advantage that internet companies have is the biggest killer of jobs. There have been studies conducted which have shown that the average tax paid by the owner of a brick and mortar company is 23%. On the other hand, internet companies end up paying only about 9%. Hence, the playing field is not level and internet-based companies have a huge advantage. This is because most tax systems are old and haven’t been updated to meet the needs of the new digital economy.

The Cons

The proposal to implement digital tax is riddled with many flaws. Some of them are listed below.

• Difficult to Enforce: The new system which will be unveiled by European lawmakers are unlikely to be foolproof. This is because the tax will only be levied on big corporations. This will encourage big internet firms to form smaller shell companies and operate through them instead of operating directly and paying more taxes. No government can restrict companies from forming subsidiaries. There might also be many other ways to evade tax. In order to prevent this evasion, a very detailed system will have to be put in place. Obviously, that will cost the government and lead to wastage of large sums of money.
• Trade Wars: Most of the big digital companies in the world are American. America has already been claiming that the European Union has an unfair trade advantage. This action will be perceived by many as deliberate taxation of American companies. The resultant Anti-European sentiment in America could lead to a full-fledged trade war. The European governments will have much more to lose from a trade war than they will gain from the digital tax.
• Unfavorable For Some Members: Lastly, the economies of some European nations are dependent upon their ability to provide lower tax rates. Companies move to Ireland because their tax rates are lower. If the tax rates are rationalized all across Europe, Ireland will lose its competitive edge. This is likely to bring about more exists from the European Union.

  The bottom line is that the digital tax is still an issue that needs to be handled with care. Needlessly rushing into a decision can do more harm than good.

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