18-15 The European Union’s Proposed Digital Services Tax: A De Facto Tariff



Gary Clyde Hufbauer and Zhiyao (Lucy) Lu | Peterson Institute for International Economics

World digital trade in goods and services, conducted via the internet, continues to expand at a rapid rate.  Global e-commerce increased from $19.3 trillion in 2012 to $27.7 trillion in 2016 (USITC 2017), and about 12 percent of global goods trade are handled on the internet (McKinsey Global Institute 2016). New technology drives this growth, and the relative absence of government barriers has enabled technology to thrive. But barriers are beginning to emerge, and particularly worrisome are localization requirements and digital taxes.

Like the United States, the European Union vigorously opposes localization requirements, which are gaining a foothold elsewhere in the world.  This Policy Brief, however, examines the other threat: digital taxes proposed by the European Union.

Digital taxes are part of a larger European agenda. Over the past three years, the European Union has sought various ways to curb tax avoidance practices and collect more revenue from an array of US multinational corporations (MNCs), triggering disputes with some of the giants in the field. In 2016, for example, Apple was ordered to pay billions of dollars in back taxes to Ireland, which the European Union said was part of its crackdown on the use of low-tax countries to shelter MNC income.3 The European Commission argues that Ireland and other EU members are violating rules against state subsidies by granting favorable tax treatments to US MNCs. This is a popular claim throughout Europe, but not surprisingly, MNCs and some member states are fighting back.

Now the Commission is exploring a new way to raise member state tax revenues from US MNCs: tax MNCs’ digital earnings. It proposed two digital taxes in March 2018: a digital services tax (DST), which would tax the part of a digital firm’s revenues attributed to European member states, and a digital profits tax, which would tax the slice of corporate profits derived in member states. Firms with global revenue exceeding €750 million and EU revenue exceeding €50 million in a financial year will be subject to the proposed 3 percent DST on revenues arguably derived from European internet users. However, certain types of revenues will not be subject to the DST, including subscription fees paid over the internet and crowdfunding revenues. The revenue thresholds and these exclusions capture important US MNCs, while allowing many EU firms to escape the proposed DST.

piie brief

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