In the same week that Facebook took a beating on the stock market over its alleged role in a data harvesting scandal, the social media giant and other digital economy companies learned that the European Union plans to hit them with a revenue tax.
On Wednesday, the European Commission (EC), the EU's executive arm, formally proposed the launch of a 3 per cent levy on revenues – not profits – as a way to capture more tax income from them. The proposal came as Facebook faced official probes into how data from 50 million of its users ended up in the hands of Cambridge Analytics, a company with a close relation with U.S. President Donald Trump and his 2016 campaign bosses.
EC and EU officials have long argued that Big Tech has proven overly talented in exploiting tax loopholes in low-tax countries such as Ireland and Luxembourg to drop their tax bills substantially. In the EU, digital business companies pay an effective tax rate of 9.5 per cent, compared to 23.2 per cent for companies with traditional business models, the EC said.
The tax proposal, which would require the approval of all 28 of the EU member states (27 after Britain leaves the EU next year), has the broad support of the biggest EU countries, including Britain, Germany, France and Italy. While unanimity will be difficult – Irish Prime Minister Leo Varadkar on Wednesday called the tax "ill judged" – some countries may introduce their own revenue taxes if the EU-wide initiative ultimately collapses.
Its implementation will be fiercely fought by the U.S. commerce and treasury departments and the American companies – Facebook, Alphabet (owner of Google), Amazon and Twitter, among them – that dominate the digital commerce industry in Europe and around the world.
Aware that the tax proposal was coming, U.S. Treasury Secretary Steven Mnuchin last week said: "The U.S. firmly opposes proposals by any country to single out digital companies. Some of these companies are among the greatest contributors to U.S. job creation and economic growth."
The tax proposal is bound to inflame transatlantic trade tensions. Later this week, the United States is due to implement tariffs on steel and aluminum imports. The EU has threatened countermeasures unless it, like Canada, gets an exemption. A heightened trade war could harden the EC's desire to implement the new revenue tax quickly. Although the EC said the tax is not specifically aimed at U.S. companies, the biggest digital companies are American.
The tax would be applied on companies with an annual global revenue of more than €750-million ($1.2-billion) and total taxable revenue of €50-million ($80-million) generated within the EU.
Unlike income tax, the revenue tax is based on where the tech companies' users live, not where the company's head office is located. For instance, if Facebook sells an ad designed to reach users in Milan, the company would pay tax on that ad revenue in Italy.
The EC's plan would see the tax applied to digital companies that offer advertising or sell user data (Alphabet and Facebook, for example), and companies that allow users to supply services to each other (Uber and Airbnb).
The revenue tax was billed as a temporary measure until a permanent solution came be found for the taxation of digital businesses. But the complexities of reaching consensus on tax issues have meant that "temporary" tax measures in the EU have often lasted years, even decades.
The EC's tax proposal seemed to have no immediate effect on Facebook shares, which rose on Wednesday after losing almost 10 per cent of their value on Monday and Tuesday.