March 23, 2018
March 23, 2018
By Wall Street Journal Editorial Board,
One difference between President Trump and the European Union is that Mr. Trump makes mistakes on his own and off the cuff, while Brussels makes mistakes by committee after careful study. So while European mandarins are kvetching about the trade war Mr. Trump risks starting with metals tariffs, Europe is now launching its own economic war with a proposal to tax U.S. tech firms.
Not that European leaders will admit the tech-tax plan they unveiled Wednesday is protectionism. The European Commission, the EU’s bureaucratic wing, is plugging for a 3% tax on revenues—no matter the profits—that large tech firms earn from sales in Europe. The companies would pay the tax to each country in which a sale occurs, rather than in the countries where their European headquarters are based, as under current rules.
For “large tech firms” you should read “American companies” since the rules are tailored to apply to the likes of Amazon, Apple, Google and Facebook . The tax proposal ensnares companies that sell digital advertising or provide a platform for online trade between third parties. This exempts such firms as brick-and-mortar department stores that sell designer handbags over their websites, no matter how digital the transactions look.
The measure would apply only to companies with at least €750 million in annual world-wide revenue and €50 million in sales within the EU. Europe wishes it had a tech company of that global heft.
The claim is that this will solve the problem of American tech giants paying “too little” tax in Europe. They’ve supposedly done this by booking profits in the low-tax European countries where they have regional headquarters. And in true European style, leaders already are demanding higher rates before the tech tax even exists. The proposal will be “only a starting point,” French Finance Minister Bruno Le Maire said this month, expressing his hope the rate rises over time.
The rate will have to rise because there’s less additional revenue here than Brussels and its political masters in Paris and Berlin believe. The European Commission claims international tech companies pay an effective tax rate of 9%-10% globally, compared to an effective rate of 23% for traditional businesses, and that the new tax will raise €5 billion more a year.
The real numbers as estimated by free-market think tank ECIPE are nearer a tax rate of 29% for tech firms and 28% for traditional companies. The main effect of the digital tax will be to redistribute revenue from the low-tax EU states like Ireland and Luxembourg that host corporate headquarters to high-tax, high-population states like France and Germany. The tech tax is essentially a back door way to reduce intra-EU tax competition.
Someone should ask if this is worth a brawl with Mr. Trump. The U.S. Treasury has complained for years about European tax discrimination against American tech companies, especially since Europe is laying claim to taxes from profits to which Treasury thinks it’s also entitled. Europe’s tax-and-tech protectionism was bad enough when the forgiving President Obama was in office. Pursuing it in the same week Brussels wants Mr. Trump to exempt the EU from U.S. steel tariffs is the kind of bad idea only Brussels could think up.
European leaders often complain that Europe hasn’t produced a global rival to Silicon Valley’s giants, and policies like this tax plan are a big part of the reason. Europe should view digital firms as engines of job creation. Instead Brussels treats e-companies mainly as opportunities for revenue extraction. Don’t be surprised if Mr. Trump sees this as an excuse to escalate his protectionism.
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