EU eyes solo move to increase tax on online giants, risking US anger

The European Commission said on Thursday it may seek to implement tax reform to raise more revenue from online giants without the backing of the United States and other rich nations, in a move that could spark a new transatlantic dispute.

The EU is frustrated at how long it is taking the world’s rich nations to reach a deal on how to tax online firms like Google fairly. These companies on average pay bills in Europe that are less than half of those of other firms.

To prevent some smaller EU economies such as Ireland or Luxembourg, which host many foreign online businesses, from blocking the move, the commission is also raising the prospect of using little-known EU rules that would prevent states from vetoing decisions on tax matters. Usually the EU decides on tax issues only with the unanimous support of its 28 members.

The commission on Thursday outlined three options for taxes aimed at internet companies that could be agreed upon relatively quickly at the EU level or by a smaller group of EU nations.

One was for a tax on the turnover rather than the profits of digital firms, another would put a levy on online ads, and a third would impose a withholding tax on payments to internet firms.

In the longer term the EU wants to change existing taxation rights to make sure digital firms with large operations but no physical presence in a given country pay taxes there instead of being allowed to reroute their profits to low-tax jurisdictions.

The EU’s preferred option would be for an agreement on this at the Organisation for Economic Co-operation and Development (OECD), which includes the United States and Japan.

But “the EU must prepare to act in the absence of adequate global progress,” Commission Vice President Valdis Dombrovskis told a news conference in Brussels, saying that a legislative proposal may come next spring.

Such a move is likely to upset Washington and other rich nations that are home to many global tech giants.

In a document setting out the distortions created by the low taxes paid by digital businesses, the commission cited several U.S. firms such as internet retailer Amazon, social media host Facebook, online entertainment firm Netflix and short-term rental website Airbnb.

In the report, the commission emphasised that unilateral initiatives taken in the EU would need to be carefully assessed to ensure they are compatible with World Trade Organisation (WTO) rules.

“We would urge caution against EU-only measures that could run the risk of creating double taxation,” Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (ACCA), a group representing accountants worldwide, said.

REMOVING VETOES

The EU will first have to reach a compromise agreement among its 28 members by December. Some states have already voiced their opposition to new taxes on digital firms, especially if decided on without a global deal in place.

To overcome this, the commission said there was a debate on whether to strip EU countries of their veto rights on tax issues, based on an article in the EU treaties that allows such exceptional action in the event of market distortions.

“There is a broader discussion whether we should move to decision-making based on majority also in the area of taxation,” Dombrovskis told reporters.

But he added: “Currently we are basing our proposal on current rules which foresee unanimity.”

Commission President Jean-Claude Juncker last week evoked another special procedure to move to majority-based rather than unanimous decisions in matters of taxation.