The Reason the EU Intends To Introduce A Digital Tax Despite US Threats

The EU would prefer a global agreement, but big US tech companies have openly and repeatedly flouted their contempt for European laws and the US government has been unyielding in negotiations.

The EU sees this as an economic necessity and the only way to get big tech companies to change their behavior. JL

Ryan Heath reports in Politico:

The EU would “really prefer a global consensus” on digital tax, but will push ahead with a regional tax, “if we need to.” The new tax is necessary due to the ease with which large tech companies minimize their European taxes. That makes it “so difficult to defend the many businesses all over the world who pay their taxes.” The U.S. was the lone holdout on a deal. Big tech companies are inviting a backlash from both consumers and regulators by repeatedly pushing the limits of EU law. Many of those companies are American.

The European Union’s powerful antitrust and Covid-19 bailout enforcer says the EU will push ahead with a regional digital services tax even if the U.S. sticks to its efforts to block a global deal. European Commission Executive Vice President Margrethe Vestager, from Denmark, is the most senior EU official to speak out in the wake of the U.S. withdrawing from negotiations on the tax.

U.S. Treasury Secretary Steven Mnuchin withdrew June 17 from talks brokered by the Paris-based Organization for Economic Cooperation and Development, which aimed to create a global system for taxing digital services in the country where each transaction takes place — at a rate of at least two percent — rather than where the tech company is headquartered.

Vestager’s strong language on the collapsing tax negotiations as well as the broader transatlantic relationship signal the EU is increasingly willing to operate with its elbows out when dealing with the United States, and has all but given up negotiating with the Trump administration.

In a wide-ranging virtual interview, Vestager said the EU would “really, really prefer a global consensus” on digital tax, but will push ahead with a regional tax, “if we need to.”

The new tax is necessary, Vestager argued, due to the ease with which many large tech companies minimize their European taxes. That makes it “so difficult to defend the many, many, many businesses all over the world who pay their taxes,” she said. French Finance Minister Bruno Le Maire told the French Senate this month that the U.S. was the lone holdout on a deal: “We were a few inches from an agreement,” he told local radio.

A frustrated Vestager said that big tech companies are inviting a backlash from both consumers and regulators by repeatedly pushing the limits of EU law. Many of those companies are American, Vestager highlighted, pointing to a long list of antitrust and tax cases against Apple, Amazon and Google as a sign companies are not learning from past EU regulatory tangles.

“I worry that we did not have one Google case: We had two, we had three. We've had one Amazon case, (and) now we have a new one. And we unfortunately had to open (two cases) on Apple.” She added, archly, “There is, I think, still a learning potential.”

President Donald Trump has previously labeled Vestager the “tax lady” over her decision to force Apple to pay over $14 billion in unpaid taxes to the government of Ireland.

Vestager’s tough line on foreign tech companies operating in Europe is part of her broader goal for “open strategic autonomy,” she said, where the continent pushes back against more aggressive U.S. and Chinese policy postures, maintains open markets, and defends Europe’s “welfare states, universal health care, universal access to education.”

But Vestager also expressed concern that despite shared “fundamental values,” the U.S. and EU are allowing themselves to be divided by China, with severe economic and political consequences.

Vestager said some Chinese companies do not compete “fair and square” and said “there is a huge problem of reciprocity” when it comes to market access in China. EU officials are frustrated that Chinese authorities block foreign companies from bidding for Chinese government projects, while suspecting that Chinese companies benefit from government subsidies, giving them an unfair advantage in the EU’s more open public tender systems.

The frustrations found concrete form last week when the European Commission supported the creation of a legal tool that would allow Brussels to crack down against foreign subsidies, including by blocking acquisitions or banning companies from participating in public tenders.

Vestager hinted that she would not be afraid to use the EU’s new powers once they are finalized. “Where I grew up in the Western part of Denmark, if you invite people over and they don't invite you back, eventually you stop” inviting them, she said.

Another possible solution, she said, would be a joint U.S.-EU “Trade and Technology Council," an idea first proposed by the EU Trade Commissioner Phil Hogan to give Western powers a place to coordinate their position vis-a-vis Chinese technology and commerce. “Right now we are not making best use” of our “shared values and having a common history,” she said.

Vestager conceded, however, that “China is a partner, for instance, on climate change,” and can’t simply be cut loose.

That has complicated the EU's response on issues like human rights in Hong Kong, where the continent has struggled to move from words to action. Joshua Wong, a leader of anti-Beijing protests in Hong Kong, last week accused the EU of running an “appeasement policy” on Hong Kong, to safeguard its economic interests in China. Vestager acknowledged Wong has reason to be frustrated with the EU — “he's in a very difficult situation.”

In the wake of the economic devastation wrought by the Covid-19 pandemic, Vestager has been put in charge of ensuring economic rescue packages passed by governments within the bloc do not unduly distort markets. And she reiterated Tuesday that she is enforcing strict rules on those who receive bailout money.

Conditions on those rescue funds include a “ban of bonuses of senior management, acquisition bans, dividend bans," she said, adding that government support must only be offered with clear “sunset clauses.”

Vestager also noted the EU attaches more stringent conditions to using government money to recapitalize or restructure a company than it attaches to short-term offers of liquidity support.

Businesses that were failing before the pandemic will not be allowed to take government money to camouflage their existing weaknesses, she added.