“Digital Transformation and Taxation – Demands from the Taxpayers’ Perspective”

Together with the OECD, the EU is making a fresh attempt to introduce a separate tax on digital services. The rationale behind this plan is that existing tax systems need to be adapted to the digital age and that large providers of digital services allegedly pay hardly any corporation tax.   

It is claimed that major digital corporations such as Google, Apple, Facebook and Amazon (GAFA), as well as the internet giant Alibaba (China), pay little or no tax. The introduction of a digital tax is intended to finally force these giants to pay tax and make their fair contribution – so argue the proponents of tax justice.

Digital companies have expenses and generate quite varied profit margins. They pay taxes and duties, both directly through corporation tax and indirectly through the creation of jobs that are subject to income tax.

Digital companies are experiencing disproportionately high growth. That is undeniable. However, the tax debate often overlooks the fact that this growth also has a direct impact on employment figures and that digitalisation has created numerous new jobs. The GAFA companies alone have provided a direct livelihood for over a million people. If we consider other companies that also offer and sell digital goods and services but are not yet the focus of attention – such as Microsoft or Nike – the scale of this issue quickly becomes clear. After all, in principle, any company that sells via the internet is also a digital company. All those employed by such companies pay their regular taxes and duties. Therefore, the debate surrounding higher taxation of digital companies is about much more than that.

If the principle of tax fairness is to apply here, the real aim must be to ensure that taxes are paid, that no taxes are evaded and that tax competition is not circumvented.

From the point of view of tax fairness, where these taxes are actually paid is, in fact, irrelevant!

A critical examination of the situation therefore raises the question of why the digital tax initiative specifically targets American and Chinese companies. Is it perhaps due to the concern amongst EU member states that they are not receiving sufficient tax revenue?

The Taxpayers’ Association advocates for fair tax competition – a fact we cannot emphasise often enough. Everyone must pay their fair share of taxes and duties. After all, what some fail to pay, others must bear. However, what digital companies now face has absolutely nothing to do with fair taxation! We have calculated this for GAFA using the figures available to us. It is clear that linking the digital tax to turnover rather than profit leads to massive distortions and an excessive burden. For example, the online retail giant Amazon achieved record turnover of over 386 billion US dollars in 2020, but only earnings before tax (EBT) of around 24 billion US dollars, resulting in a return on turnover of approximately 5.5 per cent. Consequently, the digital services tax would result in a total tax burden of 61 per cent for Amazon.

The proposed digital services tax (DST) provides for the taxation of revenue rather than actual profits, without taking into account losses or depreciation, and thus represents a direct attack on the fundamental principles of the market economy and the performance-based principle of taxation. For companies with low profit margins, this results in a disproportionately high tax burden.

It is a fallacy to infer from surpluses that companies have a greater capacity to bear a tax burden, as this directly affects their financial position as well as the allocation of reserves and equity.

Furthermore, the experience of countries that have already introduced such a digital tax (for example, Austria, France and Italy) shows that these taxes are ultimately passed on to consumers, who then have to bear the costs.

In light of the EU economic recovery package presented by Ursula von der Leyen and other programmes such as the ‘Green Deal’ etc., which envisage higher EU expenditure, loans and liabilities running into the trillions, the debate on the introduction of an EU digital tax takes on particular significance. 

The European Commission is seeking to generate additional, separate revenue for the EU. The digital tax is explicitly mentioned in this context. Yet its purpose is something else entirely. The debate on a digital tax must not be about the EU’s revenue! 

It is therefore of vital importance that we engage in this debate now and make our voices heard. It is crucial that the digital tax is discussed objectively rather than on ideological grounds.

Any discussion or proposal regarding tax reform must also include a mandatory impact assessment. After all, it is ultimately the taxpayers who will have to bear the costs!

Download the TAE position paper on the digital tax (April 2021)