Digital Tax

However, it is particularly easy for these companies to relocate their profits to wherever taxes are particularly low, as they can serve a market without a physical presence and simply move their headquarters to a tax haven. Moreover, this does not take into account essential activities such as the collection and processing of data, which is a central part of value creation in digital business models.

International Moves towards a Digital Tax

In the summer of 2019, France decided to introduce a national digital tax obligating companies to pay 3 percent tax on online advertising revenue, among other things. The tax is to apply to corporations with digital sales of at least EUR 750 million worldwide and at least EUR 25 million in France. Spain, Austria, and Italy are also preparing national initiatives. However, these new taxes have an effect similar to that of customs duties; the US government has already announced that it will take countermeasures.

As recently as December 2018, a Commission proposal for an EU digital tax failed. Half a year later, the G20 countries have agreed on a coordinated move towards a global minimum tax. In addition, there are to be new rules on where multinational companies’ profits are taxed. In the future, the location of a company’s headquarters will be less decisive. Instead, a “market country principle” is to be introduced, which is more oriented to where consumers or users of these companies’ services are located. Market countries’ taxation rights are to be extended not only for digital companies, but for all companies. The resolutions are set to be implemented as early as 2020.

ifo Evaluation of the G20 Agreement

According to ifo President Clemens Fuest, the G20 resolutions are still very vague and implementing them will be complicated. Many countries, including Germany, already collect taxes on certain foreign profits. Relocating taxation rights to market countries would require a whole new set of rules. As a country with an export surplus, Germany would lose tax revenue if taxation shifted to the market countries. However, Fuest thinks that internationally coordinated action against both non-taxation and double taxation would be a step forward. Efforts to date have mostly been unilateral and have often resulted in tax chaos, double taxation, and discrimination against cross-border investments.