[RD] Europe Pushes for Extra-Territorial Taxation of Digital Economy

[Lexicus]

So again, since Facebook is a corporation that exists at the pleasure of the public, what is the problem with taxing it for existing?

 

[Samson]

No one is suggesting that Facebook et al should not pay taxes for its business and the profit it makes in Europe.

The DST is, however, not a tax on business activity or profit. It is a general revenue tax, and this is what it makes it remarkable. It is a tax on the total receipts of the company, regardless of how much of those receipts are profit and how much are offset by costs.

Where Europe may wish to tax the money Facebook makes or how much business it does, there are ample existing tax systems to do so. Maybe they need modification, but inventing a whole new general revenue tax is unnecessary.

A general revenue tax isn’t a tax on making money, or doing business. It’s a tax on existing, and such a blunt instrument is unwelcome when other, more precise, means of achieving tax policy goals exist.

I agree this is a bit different, but the business they are running is a bit different. When the companies are funneling all revenue earned in a country to a low tax entity in the name of "professional services" or "intellectual property licencing" it is much harder to determine what a fair rate of tax for a country to collect on a service. If I was setting this up I would allow deductions for costs spent in that country (for example any employee salaries taxed in that country, any products bought there), and apply the tax rate on the difference.

 

[dutchfire]

The DST is, however, not a tax on business activity or profit.

This is false, it is a tax on business activity.

It is a general revenue tax, and this is what it makes it remarkable.

This is actually not very remarkable. Many taxes are not based on Value Added. Insurance Tax in the Netherlands is an easy example. I actually pointed this out before but you seem to have ignored it.

Where Europe may wish to tax the money Facebook makes or how much business it does, there are ample existing tax systems to do so. Maybe they need modification, but inventing a whole new general revenue tax is unnecessary.

Logical Fallacy: Appeal to tradition

A general revenue tax isn’t a tax on making money, or doing business. It’s a tax on existing,

This is obviously false.

and such a blunt instrument is unwelcome when other, more precise, means of achieving tax policy goals exist.

Here you seem to have abandoned your position that this proposal is some sort of Crime Against Humanity and slid into efficiency arguments. To me, it seems that the European Union knows better what its tax policy goals are and how they can be achieved than some random user on a video game forum.
You use the rather loaded words blunt and precise but as far as I can see the word precise here simply means "does what I wants it to do" and the positive connotations of the word are used to support your own proposal.
If we use precise in the usual meaning of the word, the EU proposal is precise. In fact, as most other users in this thread have explained, your proposal to tax Value Added is very susceptible to financial shenanigans. [Most proponents probably consider this a good thing].

 

[dutchfire]

Existing tax system are amply able to capture the commercial transactions that occur on Facebook. Advertising and marketplace sales can be described and captured by existing value-added taxation systems. Maybe those taxation systems need to be expanded, but what isn’t necessary is an overboard gross-revenue tax paid to countries based on non-commercial users. The Digital Service Tax (DST) as proposed runs counter to contemporary tax policy precisely because it is based on non-commercial activity.

Contemporary tax policy is based on the idea that tax is due on the added value of an action is owed to the locality where that value was achieved. So if a company exists in France and Germany than its profits in France are taxed by France and its German-sourced profits are taxed by Germany. This is why there’s the movement towards anti-erosion and BEPS efforts and why most of the world has adopted a value-added tax, as opposed to a straight sales tax.

As proposed, the DST would be a 3% tax on the gross revenue earned by a digital service provider that is then distributed on a more or less pro rata by population basis to EU countries. This runs counter to contemporary tax policy as a straight-up tax on revenue regardless of profit. Furthermore, the pro rata distribution by no means assures that the tax received by a nation is based upon the value the service provider received from that nation. For example, Greece and Belgium have about the same population, but Belgium has about twice the per capita GDP of Greece. Theoretically, Belgium and Greece might have about the same number of Facebook users, the but the value of a Belgian Facebook user is twice that of a Greek so prorating the distribution of tax based on users by no means assures that the taxation is imposed where the value revenue was achieved.

So this whole scheme runs counter to how contemporary tax systems work, systems that, in things like BEPS, the Europeans are trying to get other nations to endorse. Amid the significant push towards international policies to reduce profit-erosion and pulling the world towards better taxation policies, we have a proposed tax that is in many ways the complete opposite.

By the way, this entire post seems to conflate Value Added Tax/sales tax and the tax companies pay over their profits. Now, I do admit that it has been a few years since I took classes in business accounting, but these two taxes are completely separate things and the accounting concepts of profit and value added are also very different. So the arguments give here seem a bit out of place in the context of the European VAT system.

 

[Oerdin]

Basically, European pokiticians are seeing foreign businesses as pots to plunder without any consequences because it doesn't effect any companies or workers in theor area. This is, of course, criminal and illegal plus we know it is motivated by envy of more successful American companies while Europe itself remains mostly a failure in the digital space. There should be immediate sanctions on any country which engages in such blatant criminality.

 

[Yeekim]

Basically, European pokiticians are seeing foreign businesses as pots to plunder without any consequences because it doesn't effect any companies or workers in theor area. This is, of course, criminal and illegal plus we know it is motivated by envy of more successful American companies while Europe itself remains mostly a failure in the digital space. There should be immediate sanctions on any country which engages in such blatant criminality.

 

[BvBPL]

Value-added tax and income tax share the similarity that they are based on, basically, creating profit, and are focused on taxation where that profit is realized. They are common-sense taxation policies that tax where tax should be charged.

Other valid systems of taxation exist. Sin taxes, for example, are partially based on the notion that the product being tax has tangential public costs that the tax can help to offset. Tourism and lodging taxes are based on the notion that itinerants, not being subject to income taxation in the local jurisdiction, can be expected to pay more for the public services they enjoy while traveling. Both sin and tourism taxes have the benefit of being locally focused where the public costs are incurred, just as income and value-added taxes are imposed by the jurisdiction where the benefit is being realized by the taxed parties. The non-local party of the GST is problematic in this regard as it does not necessarily tax where benefit is realized nor is it necessarily distributed to the same.

By charging a tax across all EU revenue and then distributing pro rata by population, the DST is particularly poorly designed as the distribution of the taxation does not reflect where the benefit was realized nor where costs were incurred.

Revenue taxes too blunt instruments. They don’t encourage development and investment in the jurisdiction; just the opposite, they encourage disinvestment. They are blind to the costs incurred in creating revenue; income taxation is a much better why to account for the costs in doing business.

 

[dutchfire]

Value-added tax and income tax share the similarity that they are based on, basically, creating profit

No?
Let's say I have a (Dutch) cake baking company that buys €100 in ingredients, pays €900 in wages to its employees and sells €1000 worth of cake. This company has to pay VAT over the added value of €900.* The profit of the company is 0 so the company does not have to pay tax over its profits (vennootschapsbelasting).


* In practice, what can happen is that I charge VAT over the €1000 to my customers, I had to pay VAT over the €100 when I bought ingredients, and in my tax filing I get a rebate for the VAT over the €100. Alternatively, in more professional lines of business, the VAT over the €100 is not charged when the ingredients are bought, instead I communicate my tax number to the ingredients seller and they communicate this to the tax service so I can't try to claim a rebate.

 

[dutchfire]

Basically, European pokiticians are seeing foreign businesses as pots to plunder without any consequences because it doesn't effect any companies or workers in theor area.

As has been mentioned in this thread, most of the companies in question do employ workers within the EU, so this statement is wrong.

This is, of course, criminal and illegal

The law is, of course, not criminal and not illegal by definition.

plus we know it is motivated by envy of more successful American companies

As you can read in the link provided in the opening post, the motivation is "The new rules would ensure that online businesses contribute to public finances at the same level as traditional 'brick-and-mortar' companies."

while Europe itself remains mostly a failure in the digital space.

We're doing quite well actually. Faster internet. Local loop unbundling. Net neutrality. Privacy regulations. Anti-trust laws.

There should be immediate sanctions on any country which engages in such blatant criminality.

If your President reads CFC, your arguments might well convince him!

 

[Lexicus]

If your President reads CFC, your arguments might well convince him!

(okay, I'm only doing this because @BvBPL has repeatedly ignored my attempts to engage seriously with his arguments).

We're doing quite well actually. Faster internet. Local loop unbundling. Net neutrality. Privacy regulations. Anti-trust laws.

Clearly, Oerdin considers being abused by billionaires every time he uses the internet to be a matter of national pride.

 

[Senethro]

Boy howdy am I glad the US has cooled a little on installing "commerce friendly" regimes to open nations to corporate exploitation. Imagine being a Social Network Republic.

 

[Traitorfish]

Value-added tax and income tax share the similarity that they are based on, basically, creating profit, and are focused on taxation where that profit is realized. They are common-sense taxation policies that tax where tax should be charged.

Value-added tax can get pretty regressive pretty quick, though. It's essentially a tax on needing to consume things. The only way to make it halfway fair would be to introduce such sweeping exemptions that it becomes, in effect, a tax on "luxury" goods and services, and thus a particularly puritanical vice tax.

 

[BvBPL]

No?

You’re right, of course. This is why I tried to use “benefit” rather than “profit” to be inclusive of what value-added and income taxation actually taxes while still being distinguishable from gross revenue. Guess I missed an occasion. Turns out it can be tricky to discuss terms that are distinct in the realm of taxation, but are largely synonymous in the vulgate.

As we’ve discussed, there are a variety means of taxation. Why do you think gross revenue taxation is the best taxation means for digital service providers when contrasted with other means of taxation?

 

[dutchfire]

As we’ve discussed, there are a variety means of taxation. Why do you think gross revenue taxation is the best taxation means for digital service providers when contrasted with other means of taxation?

Honestly, this is a huge shift of the burden of proof. I've mainly been busy debunking the arguments presented here that this regulation would be immoral, illegal and indecent. This regulation falls well within what is usual and reasonable for taxes. It is the responsibility of our duly elected European Parliament to deal with the implementation details. I don't feel particularly inclined or capable to say if, for example, the €7 million revenue barrier is optimal, or if some other number would be better.

As for the general point of the basis of taxation, between value added, profit or general revenue, I mentioned the example of Dutch insurance tax which is also levied over revenue. As far as I know, no-one is unhappy with that particular tax.

The advantage of general revenue tax is that it avoids Hollywood accounting. This is relevant for insurance, where 'profit' can be hard to pin down in accounting. It is also relevant for the internationally operated companies discussed here, notorious for tax avoidance through dodgy constructions. Avoiding these dodgy constructions is an explicit policy goal mentioned by the EU proposal.

 

[BvBPL]

As for the general point of the basis of taxation, between value added, profit or general revenue, I mentioned the example of Dutch insurance tax which is also levied over revenue. As far as I know, no-one is unhappy with that particular tax.

That doesn’t make it a good tax. It doesn’t even make it representative of insurance premium taxes, most of which are not based on gross revenue (IPT is a diverse breed of taxation). There are plenty of bad taxes out there. New taxes should be good taxes tailored to support specific goals, not taxes that mirror other taxes in an unexamined manner. The “burden of proof,” such as it is, rests upon those who would impose the new tax to prove it is a good tax.

If existent, good tax systems are insufficient to capture taxes due then the answer is to improve the existing good tax systems and policies, not come up with other ones just because. Legislating a new tax that is supposed to capture that an existing tax already should capture but does not due to some insufficiency is a bad, unnecessary law. Fair better that tax authorities build on preexisting tax systems founded in good policy than cut new ones from whole cloth.

Value-added and income taxation seem to be sufficient for capturing the activity of digital service providers. It’d be nice to know why people think they aren’t sufficient, and why the answer is to create a whole new tax system instead of fixing the existing one.

 

[dutchfire]

The “burden of proof,” such as it is, rests upon those who would impose the new tax to prove it is a good tax.

By burden of proof, I mean the following: You started this thread with the claim that the proposed policy was Bad (possibly even Very Bad, you used the word "bogus"). I've refuted those arguments. I don't see the need to positively proof that the new tax policy is Good. The default position should be that democratically decided policy is good, perhaps akin to the Rational Basis Review in US Constitutional Law.

If existent, good tax systems are insufficient to capture taxes due then the answer is to improve the existing good tax systems and policies, not come up with other ones just because.

It's hard to call a tax system insufficient to capture taxes due "good."
There's also not much of an actual argument here. If there are problems with the current system, both fixing the problems or replacing/adding parts in the system can solve the problem.

Legislating a new tax that is supposed to capture that an existing tax already should capture but does not due to some insufficiency is a bad, unnecessary law. Fair better that tax authorities build on preexisting tax systems founded in good policy than cut new ones from whole cloth.

Fallacy: Appeal to tradition

Value-added and income taxation seem to be sufficient for capturing the activity of digital service providers. It’d be nice to know why people think they aren’t sufficient, and why the answer is to create a whole new tax system instead of fixing the existing one.

This seems to be explained in the actual proposal.

That doesn’t make it a good tax. It doesn’t even make it representative of insurance premium taxes, most of which are not based on gross revenue (IPT is a diverse breed of taxation).

Your original claim was that a gross revenue tax is "remarkable". I've provided examples of gross revenue taxes, showing that it is in fact not so remarkable. You don't seem to disagree with that?

 

[Yeekim]

It’d be nice to know why people think they aren’t sufficient, and why the answer is to create a whole new tax system instead of fixing the existing one.

I was quite pleased because you actually provided links to both the draft proposal and the impact assessment ... but I am now beginning to doubt whether you actually even skimmed either of them.
The impact assessment, specifically, addresses these questions quite extensively in the very beginning.
EDIT: Also, fixing the existing corporate taxation rules is, in fact, part of the package.

 

[Akka]

I still fail to see a problem when huge megacorporation which have the GNP of whole countries and mainly profit a tiny elite of ultra-wealthy, are being taxed. Maybe my inner socialist just consider that reducing the wealth and power of said corporations is Good by default.