On Thursday, the European Commission said that it is considering implementing tax reform for raising more revenue from online giants without the support of other rich nations including the United States. This move could end up starting a new transatlantic dispute. The EU has become frustrated at how long it is taking the rich nations of the world to come to an agreement about how they should charge taxes from online tech firms such as Google and Facebook fairly. On average, the bills paid by these companies in Europe is less than half of those charged from other firms. This move could be blocked by some smaller EU economies like Luxembourg and Ireland as they host a number of these foreign online giants.
However, in order to prevent these economies from blocking the move, the commission is also seeking to use rules of the EU that are little-known, but would effectively prevent these states from vetoing decisions taken regarding tax matters. Typically, tax decisions are made by the EU through the unanimous support of all 28 members. Three options were outlined by the EU on Thursday for taxes directed at internet giants and an agreement can be made relatively quickly by a smaller group of EU nations or even at the EU level.
One condition was for charging a tax on the turnover of digital firms rather than their profits whereas another was aimed at charging tax on online ads. The third condition suggested imposing a withholding tax on payments made to these online companies. In the long term, it is the aim of the commission to ensure that existing taxation rights are changed in such a matter that digital companies with large operations, but no physical presence in a country, do pay taxes there instead of just rerouting profits to low-tax countries and jurisdictions.
The preferred option of the EU would be to make an agreement for this at the Organization for Economic Co-operation and Development (OECD), which includes Japan and the United States. However, Valdis Dombrovskis, the Vice President of the Commission, told a news conference that if there is no adequate progress made globally, the EU is ready to take action and he hinted that a legislative proposal might be introduced by next spring. However, it is a given that this kind of move will upset Washington and other rich nations that house most of these online tech firms.
A document highlighting the distortions that occurred due to low taxes paid by digital companies was made and several US firms such as social media giant Facebook, internet retailer Amazon, short-term rental website Airbnb and online entertainment firm Netflix were cited by the commission. The commission also said in the report that they would have to assess the unilateral initiatives carefully to ensure they were compatible with the rules of the World Trade Organization (WTO). But, the first thing EU has to do is to reach a compromise amongst its 28 member nations by the end of December.