The French government has taken aim at the European Commission’s Pillar One of their proposed Digital Services Tax (DST). France is asking if it is essential that legislation relating to digital taxation should take precedence over existing EU tax rules.
French finance minister Bruno Le Maire expressed his concerns in a letter sent on Wednesday, May
France had some strong words against Pillar One. It questioned whether the program will become a success. The statements made by Finance Minister Bruno Le Maire were not surprising. But it did raise questions on whether the country’s support of EU taxation is about revenue or politics.
Le Maire said India and Saudi Arabia were causing problems. Together with the US, they’re making the implementation of Pillar One complicated. He said they would “call for the situation on Pillar One to become unblocked.” But he added there’s little chance that it would succeed.
The country’s worried the US will have problems adopting Pillar One. The US Congress might oppose it. One anonymous finance official said the Saudi government has some concerns. These are reportedly related to the exemptions from the new tax regulations. Meanwhile, India’s worries are about the capabilities of developing countries. They’ll need help in implementing Pillars One and Two.
The finance minister said the slow progress is why France decided to create a new levy. It will become imposed on the revenues of international tech companies. These revenues would generate about 700 million euros or $748 million every year.
Le Maire made the comments during a meeting with other G20 finance chiefs.
The Push for Pillar One
From a political standpoint, the EU often tries to use its Single Market system. They use it to shape policies in third-world countries. This is also known as the Brussels Effect. It’s used via the EU’s efforts to regulate and set standards. One example of this is the Digital Services Act.
The role of EU taxation is often limited to three items. They’re the VAT system, transparency, and anti-tax evasion regulations. These policies are often focused on making the Single Market more efficient. Member states also have to agree if they want to adopt a new tax law.
One policy added to the table was the taxing of the digital economy. The discussions on this type of tax policy resulted in Pillars One and Two. But the EU also tried to approve an EU digital services tax (DST). This new tax targets most of the large tech companies from the US.
The DST proposal didn’t get the support of all 27 EU members. But it led to several member states, like France and Spain, to push national DSTs. The US didn’t take the decision well and the corresponding dispute ended with a ceasefire of sorts in 2021. The US and the EU states agreed to countermand existing DSTs once Pillar One begins.
Once the OECD finalizes Pillar One, the EU has the potential domestic earnings to be a new resource. The EU Council has also adopted Pillar Two’s directive. This will give the EU more input. They can decide how other countries’ policies will fit under the new framework.
One example is the US Global Intangible Low Taxed Income (GILTI) provision. It’s not accepted under Pillar Two guidelines for the Income Inclusion Rule (IIR). The US will need the agreement of the member states for a revamped GILTI to become accepted.
Risks of EU Taxation Policies
The Brussels Effect has an impact on the revenues of companies using the EU’s Single Market system. But it will also impact the tax bases of countries that are outside of the EU’s sphere. Some proposals can also fall into the same situation, like the Green Deal Industrial Plan.
Many policymakers are now chuffed at the EU’s increased role in world affairs. But there are risks in using Europe’s tax policy on geopolitical economic rounds. For one, it could fuel new trade or tax measures in retaliation. The IS already responded to the EU’s DST. These punitive measures could have a negative effect on EU member countries.
There’s also the risk of EU tax policies becoming influenced by political situations. It’s an ineffective and inefficient way of running things. It could also endanger the region’s economic growth and hinder investments. Some well-regarded policymakers are already wary due that the EU could become influenced. One example is the current ideas of the Green Deal Industrial Plan.
Another danger is the EU tax policy could focus on geopolitical issues. Raising profits for government spending might become a secondary priority. That’s what some see in Le Maire’s comments. The negative outcome of this tax design is already felt. It led to the debate on windfall profits tax.
The EU is in a stalemate because of this. Its spending is now locked in while profit generation is uncertain. The European Commission has proposed three new options for funding the EU’s budget. But revenues from deals like the CBAM will be nil during the initial phase. A new digital tax won’t raise a lot of money either.
The EU would have to turn to a new set of proposals that are reportedly connected to the corporate sector. Some in Parliament want more EU taxes to focus on the implementation of social policies. The organization also needs to find ways to raise money to help Ukraine. They also need to help EU citizens affected by the rising energy prices.
They can only do this with tax policies that are always principled and pro-growth. These policies should focus on raising revenues in a more efficient manner. Geopolitical dreams must become put on the back burner.