Europe's Digital Tax Is a Bad Idea

The European Commission’s proposed tax on digital services is intended to make companies such as Google and Uber pay more. The idea is that such firms are gaming the rules at the expense of other taxpayers. The issue is real and needs to be addressed — but the answer under discussion breaks with both established international practice and plain common sense.

Formal talks on the plan are due to start this week. The commission is calling for a 3 percent tax on the turnover of large digital enterprises — those with EU digital revenues over 50 million euros ($40.5 million) and total global revenues of over 750 million euros. About half the companies affected would be American, the EU estimates.

The commission says it has been left with little choice. The value generated by digital companies doesn’t require a physical presence, making them harder to tax. Digital businesses arrange their affairs to exploit this: They allocate income to low-tax jurisdictions and, according to officials, end up paying an effective tax of roughly 10 percent of profits, less than half of the burden carried by traditional businesses. (One recent study disputes these numbers.)

Officials acknowledge that the right solution is a thorough overhaul of the corporate tax code, especially as it affects international firms selling digital services — and that this should be done not unilaterally but in cooperation with other countries, notably the U.S. Efforts are in fact underway, but progress has been slow, and EU officials have chosen to do something, anything, as soon as possible.

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