EU Executive Arm To Take New Tack in Taxing Tech Giants

By Natalia Drozdiak and Sam Schechner Features Dow Jones Newswires

The European Union's executive body on Wednesday pledged to make a proposal for new rules to tax internet giants, such Alphabet Inc.'s Google and Facebook Inc., embracing France's push for extra measures within the bloc to squeeze more money out of large multinationals operating in Europe.

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The move by the EU Commission coincides with a joint drive for the tax led by France and backed by Germany, Spain and Italy. Mr. Juncker flagged the coming proposal as part of a broader statement outlining the priorities of the bloc's executive body for the next two years.

Finance ministers from the four countries in a recent letter called on the commission to devise a proposal that would establish a so-called "equalization tax" on the revenue generated in Europe by digital companies so that the amounts raised would "aim to reflect some of what these companies should be paying in terms of corporate tax."

The four ministers plan to spell out more detailed suggestions, and hope to drum up more support, at a gathering of the bloc's finance ministers in Tallinn, Estonia this Saturday.

The push marks the EU's latest attempt to crack down on what officials see as tax avoidance in Europe and to assure citizens that large companies are paying their fair share of tax in the bloc where some governments are still struggling to stabilize public finances after the financial crisis.

Officials in France in particular have chafed for years at how little tax they say tech companies pay. Over the years, they have vowed multiple efforts to claw back more, floating ideas to tax internet advertising or even use of bandwidth or personal data by firms, but have pulled back because passing a measure at the national level wouldn't hit big multinationals.

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Instead, France has become an enthusiastic proponent of efforts by the Organization for Economic Cooperation and Development to reduce what it calls profit shifting, and efforts by the EU to establish a common tax base.

French pressure on the topic rose over the summer, after a French court threw out a EUR1.11 billion ($1.33 billion) tax bill that France's tax authority had issued Alphabet Inc.'s Google, arguing that it should have declared more profit--and therefore paid more tax--in the country.

In addition to promising an appeal, France's new finance minister, Bruno Le Maire, vowed to pursue new tax rules for tech companies. Behind the scenes, he also worked hard to woo other big Western European countries to support his position, eventually signing up Germany, Italy and Spain, according to a person close to the French finance ministry.

Under Mr. Le Maire's proposal, which is still being fleshed out, technology companies with revenue above a certain level would be liable to pay a tax on the turnover from customers in each EU country. The level of the proposed tax hasn't been settled, but could end up between 2% and 5% of revenue, the person close to the ministry said. The level would be calibrated to compensate for what the government thinks the companies would pay in income tax on their profits, if that revenue were reported in those countries, that person said.

That could lead to big new tax bills. Facebook reported that in 2016 its European revenue was EUR2.06 billion, although that figure includes countries that aren't part of the European Union. Facebook declined to comment on the proposal.

Another formula that has been floated for the EU-level rules would be to tax online advertising, according to an EU official. However, no details have been completed and any concrete proposal would take time, especially as officials seek to find a rule that would apply to a range of different business models, from Airbnb Inc. to Apple Inc.

Executives at tech companies say the proposals are misguided because the firms create the bulk of their value in the U.S., making much of their profit from European revenue taxable in the in the U.S., as well. But Europeans argue that those profits are fair game to tax because the U.S. lets companies defer taxes on profit they keep offshore. Tech companies often do so via subsidiaries based in countries with no corporate income tax.

The appeal of a tax on turnover that would rest on top of the existing tax system is simplicity: Countries could pass the new tax without needing to update a patchwork of tax treaties or upsetting a delicate balance between national income-tax regimes, said the person close to the French finance ministry. If approved, each EU member state would implement the tax nationally.

The EU has struggled for years to close tax loopholes because all EU countries, including low-tax jurisdictions like Ireland and higher ones like Germany, usually must agree unanimously on tax matters.

Regulators in Brussels have found another way around that blockade--by using their powers to enforce the bloc's state-aid rules and homing in on sweetheart tax deals governments have issued to large multinationals. The EU last year demanded that Ireland recoup roughly EUR13 billion of unpaid taxes accumulated over more than a decade by Apple Inc.

EU Commission President Jean-Claude Juncker on Wednesday suggested that member states should seek to approve tax legislation by majority vote, rather than a unanimous vote, so that legislation--including the coming proposal for taxing tech companies--can get passed more quickly.

Write to Natalia Drozdiak at natalia.drozdiak@wsj.com and Sam Schechner at sam.schechner@wsj.com

(END) Dow Jones Newswires

September 13, 2017 08:41 ET (12:41 GMT)