Digital tax: European Commission roadmap
BRUSSELS 15 February 2021 – ESBG issued today comments on the European Commission's roadmap on the introduction of a digital levy.
In our opinion, it is most important that a precise distinction is made as to which companies are to be covered by the digital tax. Therefore, this differentiation should primarily be done based on the core business of a company and based on how the business is conducted. Secondly, any potential up-coming definition of digital activities might be used as a differentiation criterion.
We are convinced that companies should be out of the scope of any digital levy if they have:
- one or more branches with on-site sales personnel
- face-to-face customer service and
- whose core business is not based on the provision of digital services
Furthermore, it is completely unclear on which tax base the digital tax should be levied. It makes a big difference whether an income tax or a transfer tax is designed. At this point in time, without any draft legislative texts, the intention of the EU Commission cannot be assessed at all. We believe that a design based on income tax and a link to income taxable revenues make no sense. Because the income tax burden of companies exclusively active in digital business transactions is generally very low due to the lack of, and moreover, controversial definitions of a company’s presence, its permanent establishment.
Furthermore, the determination of the income tax base is completely different depending on the Member State where the companies have to be charged. Beyond that, in the case of internationally active companies the issue around the permanent establishment would be almost impossible to manage. Thus, it can be assumed that all Member States involved would claim a share of the tax revenue for themselves (see also below).
Similarly, after years of efforts to establish a Common Consolidated Corporate Tax Base (CCCTB), a “profit sharing method” is, in our opinion, doomed to fail. Therefore, a “top-up” on the current corporate income tax” has to be ruled out. A transfer tax would be conceivable, which would ultimately be linked to the turnover within the EU (and the location of the recipient of the service, regardless of whether it is B-2-B or B-2-C) and would have to be paid in a simple procedure, if possible at source by way of deduction – which would be the most efficient way – or by way of assessment by the digital company providing the service. The registration obligation of “platforms” for VAT purposes within the framework of the “e-commerce package” also goes in this direction.
About ESBG (European Savings and Retail Banking Group)
The European Savings and Retail Banking Group (ESBG) represents the locally focused European banking sector, helping savings and retail banks in 21 European countries strengthen their unique approach that focuses on providing service to local communities and boosting SMEs. An advocate for a proportionate approach to banking rules, ESBG unites at EU level some 885 banks, which together employ 656,000 people driven to innovate at 48,900 outlets. ESBG members have total assets of €5.3 trillion, provide €1 trillion in corporate loans, including to SMEs, and serve 150 million Europeans seeking retail banking services. ESBG members commit to further unleash the promise of sustainable, responsible 21st-century banking. Learn more at www.wsbi-esbg.org.
European Savings and Retail Banking Group – aisbl
Rue Marie-Thérèse, 11
B-1000 Brussels
Tel: +32 2 211 11 11
Fax : +32 2 211 11 99
info@wsbi-esbg.org ￭ www.wsbi-esbg.org
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Financial Transaction Tax (FTT)
Eight ESBG members support the aim to curb short-term speculation and to encourage the prohibition of undesirable market behaviour. However, they do not support a Financial Transaction Tax at EU-level.
The impact on financial activities essential to the functioning of financial markets and to the real economy could be extremely negative. We believe that the following activities will be affected negatively by the proposed tax:
- The issuance and secondary markets for sovereign bonds
- The use of derivatives contract for hedging purposes
- The use of repurchase agreements to provide secured liquidity to the market
- Market-making activities
- The use of intra-group transactions for liquidity management and efficient capital allocation within a group.
Concerns of savings and retails banks around EU financial transation tax (FTT)
ESBG’s main concern with the current EU FTT proposal is that – in efficient fixed income markets such as the markets for government and covered bonds, which are characterised by low spreads between bid and offer prices – the tax will be far higher than what can be earned on market-making, especially on instruments with short remaining time to maturity.
The consequence of the tax will be that market-making will almost cease and current liquid markets are likely to be transformed into buy and hold markets. As a result, market liquidity will disappear or be significantly reduced.
Background on the FTT
A Financial Transaction Tax (FTT) builds on the work of famous Nobel laureate James Tobin. An FTT is in theory applied to a financial transaction in a similar way to how VAT is applied to goods and services but due to the very narrow margins and the international character of finance the FTT, if incorrectly implemented, may have a severe distortive impact on the economy as a whole.
In September 2011 the European Commission proposed a FTT to be implemented in all EU member states but unanimity was not reached within the Council. Nonetheless, in autumn 2012, 11 member states (Belgium, Germany, Estonia, France, Greece, Spain, Italy, Austria, Portugal, Slovenia and Slovakia) requested and were permitted to continue the work on an FTT using the enhanced cooperation mechanism. After talks in December 2015, Estonia withdrew from the group of countries that requested enhanced cooperation, reducing the number of participating countries to 10, raising questions about the viability of the FTT.
Timeline of FTT legislation in the European Union
- September 2011: the European Commission proposed an FTT to be implemented in all Member States.
- Autumn 2012: 11 Member States requested enhanced cooperation on the FTT.
- February 2013: the Commission set out the details of the FTT to be implemented under enhanced cooperation in Council Directive COM (2013)71.
- Spring 2015: French President François Hollande called for the FTT to be based on the largest scope possible with low rates thus aligning the French position with the Austrian and German position. The EU-11 decided at the January 2015 meeting that the political coordination of the work on the FTT will be done by Austria and the technical coordination of the work on the FTT will be done by Portugal.
- May 2015: FTT (EU-11) Ministers’ discussion.
- June 2016 : Member States deciding to set up two task forces responsible for discussing issues regarding the possible effects on public borrowing costs of the proposed FTT and the efficiency of FTT collection.
- October 2016: The group of 10 Member States held a new meeting setting out the types of trades that would be covered, on the basis of a proposal put forward by Austria.
- March 2017: Based on the latest talks at the finance minister level, the group of Member States is pursuing an overall opt-out for the pension fund industry.
- Autumn 2018: The European Commission is preparing a new proposal, helped by the Austrian Presidency. The income from the new FTT is destined for the EU budget. Countries participating in the FTT would get to reduce the tax’s contribution for the EU budget. However, all tax initiatives need unanimity before they can become EU law.
