France, Germany Abandon Plans For Broad EU Digital Tax

France and Germany have spearheaded a compromise digital tax that is much narrower in scope than a plan originally proposed this spring, in an effort to take some form of action ahead of European Parliament elections next year.

The proposal made by France and Germany at a meeting of EU finance ministers on Tuesday envisages a 3 percent tax on European advertising sales by digital companies, rather than the broad tax on the total revenues of large digital firms originally suggested.

The watered-down tax would take in about half of the 5 billion euros (£4.46bn) targeted by the initial plan, and would mainly affect Google and Facebook, according to an unnamed official cited by Bloomberg.

The tax has been championed by French president Emmanuel Macron as a way to show that governments are capable of taking action to rein in large tech companies, which are seen as paying minimal tax in Europe due to their use of accounting loopholes, ahead of Europe-wide elections in May of next year.

Compromise

Another key Macron policy, the introduction of higher diesel taxes intended to combat climate change, also faced a challenge this week when his government agreed to postpone the increases for six months in the face of increasingly violent protests.

The digital tax had faced defeat in its previous form due to opposition by Ireland, Scandinavian countries and Luxembourg.

Germany had remained on the fence due to concerns the tax could inadvertently affect carmakers and could spur US retaliation.

“Like any European compromise, some will be disappointed,” said France’s finance minister Bruno Le Maire. “They’ll say it’s not enough and I can understand them.”

Le Maire said the proposal is a first step toward digital tax reform.

The European Commission is to formally propose the measure in the coming weeks and member states will vote on it before the end of February, according to a draft text seen by the Financial Times.

Single market threat

A number of countries, including the UK, have proposed national digital taxes with a broader base, and the proposal doesn’t stand in the way of those plans.

The latest proposal is intended to come into force in January 2021, but only if the Organisation for Economic Co-Operation and Development (OECD) fails to reach a consensus on a global approach by then.  It would expire in 2025.

But even the narrower proposal may be too much for countries such as Sweden and Ireland, which have both indicated they are unlikely to support it.

Tax changes require the unanimous support of EU member states, and as such are difficult to implement.

But the European Commission has supported pan-EU action in the hope of heading off national taxes, which it has said would be a blow to the EU’s single market.