Digital Taxation: Rethinking global taxation

The current regime for global taxation does not reflect the reality of how multinational companies operate; we need a fresh wind through the system, and soon, argues Niels Fuglsang.
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By Niels Fuglsang

Niels Fuglsang (DE, S&D) was a shadow rapporteur on Parliament’s INI report on Digital taxation

10 Jun 2021

Since the beginning of the last century, the taxation of companies has been solely based on their physical location. In 2021, this taxation model is no longer suitable for digital companies and consumer-facing businesses. This is partly because the global tax regime is not suited to international business, and partly because we have failed to look at the effective rate when we discuss corporate taxation.

More than a year into a global pandemic, it is clearer than ever that our consumption of the services of multinational tech giants will continue to rise. The income of companies such as Zoom, Amazon and Facebook have often quadrupled or more. Their share of taxes has not.

“The income of companies such as Zoom, Amazon and Facebook have often quadrupled or more. Their share of taxes has not”

We need a global tax regime where digital companies and consumer-facing businesses are taxed based on the profit where their markets are and not just their headquarters. This means that a multinational corporation - say Apple - cannot sell millions of iPhones throughout Europe while being registered in only one place - one with an attractive tax deal - and paying 0.005 percent in effective corporate tax, as has been the case in Ireland.

A new European or global tax regime would mean that Member States can tax multinational digital companies, who generate profits in their market jurisdiction, up to a certain percentage, irrespective of where their headquarters are based. With this, we hope to remove incentives for profit shifting.

We also need a clear focus on the effective corporate tax rate. There are many reasons why a corporate tax rate does not simply equal the effective tax rate. Probably the best-known examples in Europe are the so-called sweetheart deals that the European Commission is attempting to fight.

These allow Member States to maintain an official high corporate tax rate, when in reality the effective rate can stay much lower for many companies. We saw this with Europe’s most recent tax scandal, OpenLux: Luxembourg has an official corporate tax rate of nearly 25 percent, whereas in reality, many of the companies involved in OpenLux effectively paid less than one percent.

Luckily, it seems times are changing and new winds are blowing. Only a few weeks ago, a significant majority in Parliament, across all groups, approved an own initiative calling on the Commission, the OECD and the US to enter into an international agreement on a minimum effective corporate tax rate. As the S&D shadow rapporteur I am optimistic, having reached this broad majority in cooperation with my colleagues in the EPP, Renew and the Greens.

After challenging years with the Trump administration, President Biden has taken a new position supporting increased global tax cooperation and a minimum effective corporate tax rate of 21 percent for multinationals. In our report, we also applauded the momentum that these steps have created. The report also specifies effective tax rates.

This is an important detail of our final report and a strong commitment from Member States. As long as we fail to address the effective rate, we will always keep the door open for creative tax planning.

With this common call for action, we parliamentarians aim to push the OECD to finally present a global solution after years of delay. But we also present another important demand: If international solutions should fail by this summer, the EU should present its own digital tax to remedy the broken system.

“It is about time that we present solutions and create serious consequences and let multinationals pay their fair share of taxes, just as European citizens do”

The EU is the world’s largest trading bloc, and we are in a position to demand justice from multinationals if we join forces across the EU. Some Member States have already introduced such measures. We cannot accept punishment for our own European neighbours, and therefore we have to act in unison. 

Although tax matters should be a national competence, we have to realise that corporate taxation is no longer decided fully by Member States and has not been so for many years. For too long, multinational and digital companies have decided their own tax rate.

It is about time that we present solutions and create serious consequences and let multinationals pay their fair share of taxes, just as European citizens do. To make that happen, we need to work together in the EU.

Read the most recent articles written by Niels Fuglsang - Offshore Energy: it’s time for the EU to lead by example in renewables

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