9 Oct

Web Tax: Europe Targets US Tech Companies

WRITTEN BY Shankar Iyer

European Competition Commissioner Margrethe Vestager could soon be promoted to executive vice president. She’s well known for crusading against US-based corporate tech companies in Europe. Until now, Vestager has been responsible for fining Google (GOOGL) around $9 billion in multiple cases. She also handed Apple (AAPL) a record fine of over $15 billion for tax evasion.

European parliamentary hearing

On October 8, Vestager spoke in front of the European parliament. Her speech was in connection with her nomination for the role of executive vice president of the European Competition Commission. If confirmed by the European parliament, Vestager could soon be back with a vengeance to take on tech corporations. The European Competition Commission’s objective is to safeguard business entities in the European Union and maintain healthy competition levels.

In previous cases, Vestager has come up against Alphabet on issues such as antitrust allegations, the use of illegal practices to restrict competitor businesses, and even tax evasion. In the new role, Vestager could take stronger measures against US tech companies. Some critics in Europe suggest breaking up those companies that violate European regulations. However, Vestager suggested the use of less disruptive measures and other means of achieving compliance.

Vestager told parliament, “Breaking up companies, well, this is a tool that we have available, it can be done. The thing is I have obligation to use the least intrusive tool in order to restore fair competition.”

Healthy market competition

Vestager is a sort of European counterpart to Nydia Velázquez, chair of the Small Business Committee in the US. Both regulators have large-scale tech corporations under their watches. Both also expect fair and healthy competition in the market among large-scale business enterprises and small business units.

Vestager also said, “Climate change, and the digital transformation, will affect every single part of our lives. And as global competition gets tougher, we will need to work harder than ever to preserve a level playing field.” Sources suggest Vestager could soon draft a Digital Services Act in Europe. The new act could upgrade corporate accountability and data protection in the European Union.

The way Europe is tackling the dominance of digital giants could also provide some ideas to the Small Business Committee in the US. Vestager hopes for global agreement on a Digital Services Act.

Web tax in Italy

Italian Minister of Economy and Finance Roberto Gualtieri could soon introduce a new web tax in the country. The proposed tax levy could roll out in 2020. It aims to restrict tax-avoidance measures by large scale tech companies in the European region.

Most often, digital and tech companies tend to shift the onus of tax to low-tax countries within Europe. The web tax will levy a surcharge at the place where revenue is first accrued—not in the place where the income is recognized.

In the past, Google, Amazon, Apple, and Facebook have faced the ire of European regulators. Most of these companies’ EU headquarters are located in Ireland or Luxembourg. These two countries have the lowest tax structures among all other countries in Europe. Companies could book revenue at their headquarters in these low-tax regions. Taxing revenue at its place of origin could potentially increase tax liabilities for these companies. In turn, it could drag on the net income margins in their income statements.

Web tax in Italy: Rules and applicability

With the new tax in place, companies can’t shift the incidence of tax. Gualtieri said in the parliament hearing, “Profits have to be taxed where they are made.” Netflix is one US company that accepts the changes in taxation norms in Europe, albeit without loopholes. Netflix could soon be partnering with Italian broadcaster Mediaset. Reed Hastings, the founder of Netflix, said that the US streaming services company would soon open an office in Italy. He also said Netflix would honor the tax laws in Italy.

Even the Italian Budget Law 2019 mentioned the web tax. It will apply to companies that provide digital services. As per the official release from regulators, the tax will accrue every quarter and will be payable the month after the quarter ends. The web tax levy is payable at 3% of a company’s taxable income. Any digital company with revenue exceeding 750 million euros in a year will fall under the purview of the web tax. An additional clause states that the tax will also be levied on a company if the annual revenue it generates in the Italian region exceeds 5.5 million euros.

The web tax will be applicable on revenue that’s generated in three specific areas:

  • online advertisements on any device
  • ads leading to the sale of goods or services—in other words, commission revenue from e-commerce sales
  • user data transmission or lead generation

Conclusion

The Italian Digital Services Tax is a mirror of the proposed Digital Services Tax in the European Union. The only difference is that the proposed EU tax is much more scalable than the Italian version.

Vestager spoke about implementing the Digital Services Act in her parliamentary presentation. She went on to say that how companies treat user data should also be defined in the act.

In other words, the framework for e-commerce commissions and lead generation will be outlined in the Digital Service Act. The broad act will discuss aspects such as the taxation of digital services. Vestager also called for a global response to the regulation. If a global agreement can’t be reached by the end of 2020, the European Union might go ahead with the act alone.

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