Digital firm equalization levy could only hit large multinationals, be limited in scope, French tax official says

by Julie Martin

Some countries are advocating that a proposed equalization levy on digital firms, advanced as a temporary tax by France and other EU countries, should only apply to large multinationals or specified types of digital services, a French tax official said November 29.

The equalization levy, first proposed by German, French, Italian, and Spanish finance ministers at a September informal ECOFIN meeting, has since gained the support of majority of EU countries. The levy is designed to serve as a stop-gap measure until agreement can be reached internationally on revising the corporate income tax system to more effectively tax digital firm income.

Speaking at Georgetown University Law Center in Washington DC, Edouard Marcus, Deputy Head of the Tax Policy Directorate at the French Ministry of Finance, said that France is currently pushing for acceptance of the equalization levy at the OECD level.

Marcus said that the equalization levy would tax a firm’s digital turnover in each country, drawing from the OECD/G20 base erosion profit shifting (BEPS) Action 1 report. As outlined in the BEPS report, the tax would be imposed only if a non-resident enterprise has a significant level of presence in a country.

Marcus said that although it seems logical to apply the tax to all digital services in a manner consistent with the corporate income tax, some advocate adopting definitions in the EU VAT directive, which only covers “pure” digital services.

Another approach suggested is to cover only those digital activities identified as urgently needing this quick fix remedy. Such an approach is now being considered by Italy, which is weighing a unilateral measure taxing online advertising revenue, he said.

Marcus also said that some argue that the tax should only be imposed on large multinationals, proposing to set this threshold at 750 million Euros turnover, the amount that currently applies for country-by-country reporting. Another threshold discussed, he said, would assess whether there is a significant level of presence a particular country.

Economic double taxation must also be addressed, Marcus said, noting that limiting the scope and threshold of the tax would reduce this risk. Some countries contemplate offsetting corporate income tax with equalization tax on the same activity if both taxes are charged in the same country, he said.

Marcus also said the tax must be structured so that it does not discriminate and can thus meet trade agreements. Regarding implementation of the tax, ideas could be borrowed from the EU’s one-stop-shop for VAT, he said.

Other issues in need of resolution include how to transition to the long-term corporate tax system solution. Maybe a sunset clause can be added that would abolish the tax as soon international agreement on corporate taxation is reached, he said.

Marcus said France’s first choice is work with the EU to reach international agreement on this temporary measure and on any long term solution revising the taxation of digital firms. He acknowledged, though, that absent international agreement, EU countries may decide to adopt unilateral measures, given concerns about revenue losses and the anti-competitiveness of the current system.

Georgetown Law professor Itai Grinberg expressed strong opposition to an equalization levy, charging that it is aimed at squarely at large US multinational tech firms.

“I think that the biggest thing everyone in the room should be worried about . . . is the apparent mercantilism, whether that is or is not a motive, of saying that ‘we need a special tax on digital companies, but only on large ones, which in effect means American ones,'” he said.

Grinberg said that if France or the EU adopt an equalization levy, the US will likely retaliate.

He said that an unfortunate aspect of the situation is that there is no credible negotiating partner in the EU. According to Grinberg, EU efforts to tax American MNEs through application of State aid law and EU proposals for public country-by-country reporting reveal that Europe is unable to live up to the commitments it made in the BEPS project.

Georgetown Law professor Charles Gustafson predicted that if the French initiative does not yield international consensus on the taxation of digital firms, a number of countries will decide to unilaterally adopt aggressive positions taxing digital firms. If these measure yield additional revenue, they will be emulated by other countries, and, ironically, this will likely lead to international consensus, he said.

Similarly, Lilian Faulhaber, an Associate Professor of Law at Georgetown University, said that while she does not approve of countries adopting unilateral measures to tax the digital economy because of the chaos that would ensue, one benefit would be that countries can observe what does and does not work and can use that information to fashion the next law.

Julie Martin

Julie Martin

Founder & Editor at MNE Tax

Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.

Martin has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.

Julie Martin


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