Taxing the Digital Economy – Impact of Tax Changes on Selected Locations (Upper Bavaria/Bavaria and/or Germany

Tasks

Firms of the digital tech branch are frequently accused of paying not enough in terms of taxes, e.g. by exploiting tax-favoring conditions in tax havens. Against this background, the EU has recently proposed to introduce a tax on specific sales revenues of those firms. According to its proposal from March 2018, it plans to charge a tax rate of 3% on revenues from selling user data, placement of online advertisement and the provision of online market place infrastructure. Companies with total revenues smaller than 750 Million Euro worldwide and less than 50 Mio. Euro in beforementioned digital sectors are exempted from the tax.  The aim of this project is to analyze the economic consequences and the fiscal effects of the digital tax and to derive policy recommendations.

Results

This study highlights some important economic drawbacks that the current proposal of a digital tax has. By focusing on the revenues instead of the firm profits the tax favors firms with relatively high profit margins – potentially those with higher market power and established business models as compared to new market entrants such as start-up firms. Moreover, given that profit margins are smaller in times of crises, the tax has a pronounced procyclical character with higher taxes relative to profits in downturns, thereby amplifying the effect of the recession for firms. The study also estimates the potential revenues from the introduction of the tax. Depending on whether digital revenue taxes can be deducted from usual corporate profit taxes or not, we estimate the revenues to be between three to four billion Euro in total which is equivalent to only 0.1% of total tax revenues in the EU.

Importantly, given that the tax would hit mostly firms from the United States and has therefore the same effect as an import tariff on their services, the introduction of the tax could trigger potential retaliation measures which can easily offset little revenues from the tax.

Publication (in German)

Fuest, Clemens, Volker Meier, Florian Neumeier and Daniel Stöhlker, Die Besteuerung der Digitalwirtschaft - Zu den ökonomischen und fiskalischen Auswirkungen der EU-Digitalsteuer, Impulse für die Wirtschaftspolitik, IHK für München und Oberbayern, München, 2018, 01–42 | PDF Download