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It only takes one to start a trend

Kitty Miv, Editor
17 December, 2018

Last week, Kevin Brady, Chairman of the House of Representatives Ways and Means Committee, issued a statement welcoming the "abandonment" of the European Union's proposed digital services tax. However, I think that was a piece of wishful thinking on the Texas Republican's part. The EU rarely abandons anything, least of all high priority tax initiatives. I refer you to the common consolidated corporate tax base (currently gridlocked) and the financial transaction tax (back from the dead).

However, that France, Germany, and Austria (which currently holds the EU presidency) were last week prepared to accept a watered-down digital tax proposal in return for an agreement was an indication of just how strongly certain member states (notably Ireland, Sweden, and Denmark) oppose the idea, and therefore just how unlikely it is to be implemented in its original form.

The compromise text argued that the tax should be "an easy-to-implement measure targeting the revenues stemming from the supply of digital services where users contribute significantly to the process of value creation." It should apply, it said, "to revenues resulting from the provision of certain digital services only." However, the fact that the EU is insistent on a revenue tax may be at the heart of the problem.

As has been pointed out many times since the European Commission went rogue on digital taxation and published its controversial proposals last March, taxes on revenues just aren't the done thing. The US Senate Committee on Finance warned in its recent letter to EU leaders that such a tax would violate "the long-held principle that taxes on multinationals should be profit-based, not revenue-based." They also stated that the EU "already has a revenue tax based on the location of customer," in the shape of VAT, meaning that the digital services tax would lead to the double taxation of multinational companies.

Where the EU goes from here with the digital tax is unclear. In a sense, it's a bit like Brexit; the outcome could end up being very different from the original idea. What's more certain though, based on the post-meeting comments, is that the EU hasn't given up yet.

Then again, maybe the end of the road is in sight. France has indicated that its reserves of patience are stretching thin. According to a recent television interview given by Finance Minister Bruno Le Maire, France will seek a national solution to the digital tax challenge from March next year if no EU agreement is forthcoming. Indeed, given that Italy, Spain, and the United Kingdom have already decided to break ranks, the EU's attempt at a consensus may have created the perfect breeding ground for the forces of unilateralism – the very thing everybody, including the United States, is dreading. So, Chairman Brady, be careful what you wish for!

Moving on, and the OECD's latest global tax revenue statistics show that governments are increasingly relying on value-added taxes, goods and services taxes, and other consumption taxes of this ilk for a large percentage of their receipts. Well, that's hardly surprising considering that in India they have apparently decided to impose GST on free stuff too – specifically, free stuff provided by banks. I have to say, in my long experience of the world of taxation, that is an entirely new one on me. Perhaps April Fool's Day actually falls in December in India?

Anyway, for what feels like time immemorial, the likes of the OECD and the IMF have been trying to convince countries to shift their tax burdens towards indirect taxation and away from income, because this is supposed to be a more growth-friendly way of generating tax revenue. And judging by the latest stats, governments seem to have been listening. VAT continues to comprise the lion's share of consumption taxes collected, reaching an all-time high of 6.8 percent of GDP in 2016 (the most recent year for which data is available), with these taxes making up 20.2 percent of the total tax mix.

The problem is though, since the financial crisis of 2008/9, some countries have pushed up VAT rates so high – 25 percent in some cases – they've got few other places to go when they need to squeeze addition revenue from the system, other than widening the tax base, or hiking more economically unfriendly taxes. Unless, like India, they start taxing free stuff. It only takes one to start a trend.

Another thing that the OECD and the IMF have been urging countries to do with increasing persistence recently is to tax carbon emissions, and to tax them at a meaningful level. However, their powers of persuasion can only extend so far, it seems. Putting aside the divisive debate over whether carbon taxes are effective or even necessary in the first place, one thing is clear, according to the OECD: three years on from the commitments made at the 2015 United Nations Climate Change Conference (COP21) in Paris, the overwhelming majority of governments have not taken the necessary action to contain growing risks to the climate.

Even in those countries with carbon tax plans, things aren't going so well. Canada's framework of carbon taxes, for example, appears to be disintegrating before our very eyes thanks to objections in the provinces to the federal Government's Pan-Canadian carbon tax framework. Meanwhile, South Africa continues to make very heavy weather of its long-proposed carbon tax. All being well, this should be in place by June 2019 at an initial rate of ZAR6 per tonne (the equivalent of less that USD0.50). Given the South African carbon tax's recent legislative history, however, perhaps don't hold your breath. Or, given that a USD0.50-per-tonne carbon tax might not be much of a deterrence to carbon emitters, maybe you should!

Tags: Euro | Government

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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