President Donald Trump took flak from the media elites for saying, “I think the European Union is a foe, what they do to us in trade.” The president is correct — the EU is a foe to the United States — but the competitive aspects of the relationship are not limited to trade or the EU’s insistence their companies continue doing business with Iran to spite U.S. sanctions. Rather, the most critical component of this economic rivalry is over taxes, and the EU’s proposed digital tax is Exhibit A.
For decades, the United States has been an incubator for innovation by attracting talent from all over the world and providing a culture that promotes business. The same culture does not exist in Europe, and the data prove it.
European businesses have fallen woefully behind their global counterparts — so much so that not one European firm made the list of top 20 biggest internet companies by valuation. Rather than foster an environment that rewards innovators and ignites the entrepreneurial spirit, Europe’s answer is state aid cases, antitrust enforcement actions, and, of course, new taxes.
The European Commission, the legislative body of the EU, has proposed a tax on digital services intended to make technology companies “pay their fair share.” The commission is calling for a 3 percent tax on receipts of large digital enterprises, those with EU digital revenues over $58 million and total global revenues over $877 million.
This tax is nothing more than a thinly veiled revenue grab from American technology companies. The commission claims this tax is a facially neutral attempt to tax digital service providers without a physical presence, yet over 50 percent of the companies impacted are U.S. based.
Some tax officials in the EU are pointing to the recent U.S. Supreme Court Case South Dakota v. Wayfair Inc., which eliminated the “physical presence” standard — a keystone of state sales and use tax nexus for 26 years — as justification for their new digital tax. What is often overlooked is that the decision in Wayfair only streamlined a state’s ability to collect taxes from the vendors that were already owed by the consumer; it did not create a new tax.
The proposed digital tax would also fly in the face of international norms. A sales tax on digital advertising revenues rather than profits would overturn longstanding international principles on corporate taxation. The Organization for Economic Cooperation and Development has even acknowledged that the digital economy is increasingly becoming the entire economy, and efforts to ring-fence the digital economy with special tax regimes have proved unworkable.
The OECD should be a venue where the United States can fight back against this economic piracy. Trump, however, has yet to nominate someone to serve as ambassador to the OECD, and the EU is taking advantage of this vacancy. Fortunately, Congress is catching on.
In a recent letter to the president, Sen. Tim Scott (R-S.C.) and 11 other influential members of the Senate Finance Committee wrote, “the EU has also asked the OECD to review the international provisions of the Tax Cuts and Job Act (TCJA), which are designed to curb the very practices that this digital services tax alleges to address. The best course of action for European countries is to enact pro-growth tax reform like the TCJA, instead of seeking to target U.S. companies through international bodies.” Congressman Jim Renacci (R-Ohio) led a similar letter from a group of House Republican tax-writers to the president.
The lack of government intervention, however, is not solely to blame. Discussing how U.S. business have been slow to engage, former Assistant Secretary for Tax Policy Pam Olson quipped at a recent OECD Tax Conference that “if the gallows are going to be built, maybe you want a role in designing them?” Providing constructive feedback on how to design your own demise seems futile, but the business community should certainly take a more vocal approach in opposing these unilateral efforts. For his part, Trump needs to send the EU a message by nominating an ambassador to the OECD with a chainsaw to cut off any further attempts to make American innovators their global piggy bank.
Surya Gunasekara is of counsel at Capitol Hill Consulting Group, where he handles tax policy issues. He previously served as chief of staff and tax counsel to Rep. Jim Renacci (R-Ohio).
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