Despite the emergence of new digital activities and the increasing digitalisation of our societies, our tax rules have not changed for nearly a century. They are still based on the principle of a physical presence, whereas the activity of digital companies is inherently intangible. As a result, they are currently barely, if at all, taxed in the European Union. The effective tax rate on the profits of digital companies is on average 9%, compared to more than 20% for traditional companies. This situation is intolerable. It threatens the long-term sustainability of our public finances. It distorts the conditions of competition for companies operating in our single market. Finally, it undermines the most fundamental principles of tax justice, and weakens the ordinary citizens’ acceptance of taxation as the basis of our modern states.
To put an end to this injustice, in March 2018 I presented two proposals to ensure the fair taxation of digital activities. The first one aimed to modernise the rules on corporation tax by introducing the concept of « digital presence » in order to fill the legal gap that prevents EU Member States from taxing digital companies. The second, more targeted proposal aims to introduce a temporary tax on the turnover generated by certain digital activities in the Union in order to fill the growing hole in the coffers of our Member States.
After 13 months of intense negotiations and sometimes heated discussions, the EU’s 28 Finance Ministers unfortunately failed to reach an agreement on these proposals. I obviously regret this, but it came as no surprise. In EU taxation policy, the unanimity rule has often paralysed us. I suspected that a minority of Member States, defending a European taxation framework in which competition is a tool for competitiveness, would block progress. Despite our best efforts and the pressure from public opinion and the European Parliament, this blockage could not be overcome.
However, the complex work that brought us close to a compromise has not been in vain. On the contrary, our initiative has turned taxation of the digital economy into a political priority in the EU and around the world. I believe that this is one of the most significant achievements of my mandate as European Commissioner for Taxation.
In the absence of an agreement at 28, several EU Member States have decided to create their own digital tax: Spain, Italy, the UK and, of course, France, which has just adopted a law introducing a tax on digital services. It should be noted that all these countries have pursued an approach based on the tax model proposed by the Commission. This proves that we put a solid proposal on the table and that the momentum provided by the European Commission was decisive. This is a positive signal to limit the fragmentation of the internal market.
But we have also shifted the lines internationally. Under the impetus of the EU, digital taxation has emerged as a key topic in discussions between the world’s major powers. After several months, we have succeeded in triggering a global movement for better tax governance. Our proposal for a European tax has also worried some of our partners and allowed us to exert pressure which proved useful for drawing them into the international discussion, which they had previously blocked.
We made substantial progress at the G20 Summit in Osaka last month. We took a decisive step towards a global digital tax by setting ourselves the objective of reaching a common solution by 2020 and agreeing on the work plan, developed by the OECD, based on two pillars:
- The first pillar aims to redefine the contours of fair and equitable taxation of digital companies. This means examining the question of taxable presence and the share of income to apportion to each country in which a taxable presence is recognised. These discussions have much in common with those I have led at the European level on the Common Consolidated Corporate Tax Base and on the concept of “digital presence ». This demonstrates the importance of the work done and the expertise presented by the European Commission and confirms our role as a world leader in good tax governance.
- The second pillar is about establishing a minimum corporate tax rate. The aim is to establish a floor for tax competition to preserve countries’ ability to raise taxes and thus finance public services. Once again, this proposal is in line with the battles I have fought for tax justice over the past nearly five years.
The next step in the negotiations will be the G7 meeting in Chantilly, which I will attend on Wednesday and Thursday. I am going there with a clear objective in mind: to ensure that we make progress on both pillars in the interest of more effective and fairer taxation in the EU and the world.
Much remains to be done, both at the technical and political levels, to achieve a comprehensive and consensual solution by 2020. Considering the progress made over the past few months, I am optimistic. However, it is crucial that the European Commission remain a leader in the negotiations because experience shows that it has the power to change mindsets and, in the end, legislation.
I therefore hope that the taxation of digital technology will be a priority carried forward by the next Commission with the same vigour, strength and determination as during this mandate. This is an essential condition for meeting the expectations of our citizens and putting an end to the tax injustices that undermine our societies.