Taxing the GAFA in Europe: state of play, risks and solutions

Taxing the GAFA… Here is an idea that seems to be promising. But easier said than done: one the one hand the US are denouncing an anti-American measure and Scandinavian countries are afraid of having to tighten their tax system. One the other hand, France is threatening to create a national law if no agreement has been reached by March 2019. So, what can the European Union do? And what will be the consequences for the EU?

How the EU is coping with taxation

On the 4th of December, an agreement took place between the EU Member States. However, the EU seems to be crippled by the lack of cohesion between its members and the unanimity principle. This led to undertaking measures far beneath what was originally planned. Indeed, only Google and Facebook will be concerned by the measures and the tax basis will be limited to the trade of commercial data linked to online advertisement but will not apply to data resale by e-merchant. As a result, the EU can expect a 1.3 billion euro tax return instead of 5.

What are the risks for EU Member States?

First of all, the EU could be accused of a lack of democracy. In every EU country, citizens appear to be scandalised by the profit made by the GAFA. Their exemption from national taxes is considered as unfair. Not listening to these social claims could lead to upheavals as it is already the case in France. Another damage caused by this absence of taxation would be drastic financial losses. Indeed, according to a 2017 report made by a European deputy, the loss of income for the EU due to the tax optimisation practiced by Google and Facebook would amount to 5.4 billion euros for the 2013-2015 period. Finally, this crisis might weaken the EU status by revealing its lack of power. Some voices are already raising and denounce the Member States’ submission to the United States.

What can the European Union do?

First, as the May 2014 ‘Report of the Commission expert group on taxation of the digital economy’ indicates, the EU should stop making a difference between the GAFA and other digital companies in order not to ostracise them. Second, the EU should reinforce cooperation between Member States through increasing information exchange, disincentives to commit fraud and coordination of international tax agreements at EU level. Finally, the EU should keep working on the concept of digital presence, in addition to physical presence. So far, this distinction was not made, since companies were taxed according to their physical localisation. The European Union has already started elaborating a common definition, taking into account the revenue, number of users and number of commercial contracts for digital services offered by companies.

Taxing the GAFA in Europe is a catch 22 situation: one the one hand, the EU risks to be boycotted by the US and big companies if it decides to go forward. On the other hand the EU is threatened by financial losses and democratic anger if it does not act. The only way EU can overcome this situation is by working on both the concept of digitalisation in order to adapt its legislation to this new phenomenon and on tax harmonisation within its Member States to demonstrate internal cohesion on the international scene.