Digital taxes are supposed to level the playing field between digital and non-digital businesses. But such a solution will only work on an international level. Germany, Austria, Switzerland, Luxembourg, and Liechtenstein now want to move ahead.

It’s not a new discussion: How to tax international IT-companies like Google, Amazon, Facebook, or Apple? They offer their services worldwide without operating local representatives that create a tax obligation. As a result, many international IT businesses today pay relatively low taxes.

That has to end, according to the finance ministers of the German-speaking countries. The ministers of Germany, Switzerland, Austria, Luxembourg, and Liechtenstein met in Vienna last week to discuss current challenges. Besides Corona, digitalization, and the recession, the digital tax was on the agenda. All four ministers agreed that there needs to be an OECD-wide digital tax.

What is a digital tax?

The issue is this: If Google, for example, sells ad services in Liechtenstein, it doesn’t operate a business in Liechtenstein, meaning there is no tax obligation in Liechtenstein. Politicians argue that creates an unfair tax advantage for digital business models, as they also indirectly benefit from the infrastructure of the countries where they offer their services.

Today, digital businesses pay on average 8.5 percent in taxes, according to the European Commission, while non-digital businesses pay on average between 21 and 23 percent on their annual profits. That’s where the digital tax comes in. Businesses offering digital services should pay a tax where they offer their services, not only where their businesses are physically located and registered for tax purposes.

Gernot Blümel, Finance minister from Austria, said “a small business around the corner should not pay higher taxes than a multinational corporation.” His counterparts Olaf Scholz (Germany), Pierre Gramegna (Luxembourg), Adrian Hasler (Liechtenstein), and Ueli Maurer (Switzerland) agreed. Scholz would like to see such a tax being introduced already this coming fall.

Governments need money

Part of the urgency is, of course, the massive blow that the corona crisis had delivered to fiscal budgets. A digital tax might be one way to increase tax revenues. That’s particularly attractive for governments, considering that digital businesses have, on average, fared much better during this crisis than most other industries. Especially big tech companies have seen their profits soaring. The Nasdaq is up 25 percent year to date, and Apple has exceeded a market capitalization of $2 billion.

Scholz believes a digital tax on the European level would prevent infighting in Europe about tax revenues. A European tax would have “consequences for national and European laws and prevent conflict.”

It only works as an international agreement

Whether or not it is realistic to agree on such a tax by fall is not clear. Even though most countries agree that a digital tax makes sense in theory, there is a dispute about how to structure such a tax regime.

Pierre Gramegna from Luxembourg said, “especially in the case of digital businesses, we need a pan-European solution.” Such solutions, however, have historically been difficult, as the member states compete heavily. Luxembourg and Ireland, for example, have attractive tax regimes for international businesses. Austria has a corporation tax of 25 percent, Hungary just 9 percent. It won’t be easy to achieve an agreement among all member states. On top of that, the USA has withdrawn from the negotiations, as an international digital tax would first of all hit American businesses.

And that’s exactly the issue with such taxes. Should Liechtenstein support the initiative? Small countries need to carefully consider if the additional tax revenue is really worth the competitive disadvantages a tax might bring about. Liechtenstein might not be home to many international corporations. Still, a digital tax, depending on how it is being structured, would also harm small businesses as bigger corporations simply increase their prices.

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