Tusk tells EU leaders that tax system is ‘not fit for purpose’

Ireland wary of any changes that seem to favour larger countries

Tax overhaul: the EU will argue that digitalised businesses such as Amazon, which has warehouses (above) across the continent, face an effective rate of 9.5 per cent. Photograph: Pablo Blazquez Dominguez/Getty

Tax overhaul: the EU will argue that digitalised businesses such as Amazon, which has warehouses (above) across the continent, face an effective rate of 9.5 per cent. Photograph: Pablo Blazquez Dominguez/Getty

 

The president of the European Council, Donald Tusk, has warned European leaders ahead of their summit discussions on Thursday that their tax systems are no longer fit for purpose in the digital age. States’ inability to levy tax where wealth is created is leaving holes in national finances, and corporate tax avoidance and evasion by digital companies have also strained taxation systems, he argues.

The European Commission, which on Wednesday publishes its own proposals, warns that internal EU debate is inevitable and that, if leaders do not grasp the nettle, many member states will simply introduce a patchwork of their own measures.

On average, it is expected to argue, digitalised businesses currently face an effective tax rate of only 9.5 per cent, compared with 23 per cent for traditional companies. The commission is expected to propose two measures: agreement that states can tax profits arising in their jurisdictions even if the companies involved have no physical presence there; and an “interim” tax for digital services, probably of 3 per cent.

Common tax base

The structural measure, akin to commission plans for a common tax base, is seen by Ireland as a particular threat that favours large countries, where most economic activity occurs, at the expense of smaller ones like Ireland and Luxembourg, where digital companies may be located.

The second proposal, seen as a necessary immediate measure ahead of a broader agreement, will target profits generated by user data through advertising or through the sale of data collected by companies such as search engines and social-media platforms. It will also target services provided by such companies; these include onward sales of products produced by others, such as Amazon sales of second-hand books that sellers advertise on its sites. Profits from Amazon’s own book sales will not be taxed yet.

In his welcoming letter to EU leaders ahead of their summit, Mr Tusk acknowledges a new “very different market reality” in which digital companies now trade extensively in states where they may lack a physical presence. That poses a new challenge to authorities in taxing their activities, compounding the reality that “our taxation systems have come under strain as a result of corporate tax avoidance and evasion”.

“All these developments lead to an erosion of the tax base, effectively reducing government tax revenues,” Mr Tusk said. “This, in turn, has an impact on national budgets and ultimately on the financing of public services. In short, it affects ordinary citizens’ quality of life. It is important to tackle tax issues at both the EU and the global (OECD/G20) level,” he writes, but “it is clear that international action on adjusting digital taxation rules will take time. This begs the question whether or not more immediate, temporary measures at the EU level should be taken.”

He invites the leaders to consider how they should tackle the challenge and how “we best ensure a synergy of efforts at the EU and international level”.