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Europe could target Silicon Valley with taxes to help it rebound from the coronavirus-fueled recession

Key Points
  • Governments are dealing with the greatest economic crisis since the Great Depression and need fresh cash to support their economies.
  • Taxing tech firms more might be an option.
  • France, Italy, Spain, Austria and the U.K. are some of the countries that have drafted plans for a digital tax.
  • However, other parts of the world are also looking at taxing digital services.
The EU flags are seen in front of the Berlaymont, the EU Commission headquarter on May 19, 2020, in Brussels, Belgium.
Thierry Monasse

Tech giants could be forced to pay higher taxes in Europe as governments search for new revenue to deal with the ongoing coronavirus crisis, three experts told CNBC.

Taxing tech firms such as Google, Facebook or Amazon has been a thorny subject in Europe. Countries failed to come up with a joint digital tax in 2019 and deferred the negotiations to the OECD (the Organization for Economic Cooperation and Development). In addition, some nations, such as France, decided to implement their own digital taxes regardless, but their actions sparked a trade spat with the United States.

Different governments are now dealing with the greatest economic crisis since the Great Depression and they will need fresh cash to support their economies. They might look at tech firms for that extra revenue. 

"We see digital goods/services tax conversations advancing most rapidly in Europe, where the scale of ambition to use the EU budget to finance economic recovery from coronavirus may see Brussels taking an increased interest in the attractive potential tax base of e-commerce and digital services," David Livingston, an analyst at the research firm Eurasia Group, told CNBC Wednesday.

The European Commission, the executive arm of the EU, is due to unveil new spending plans this week. The institution is likely to look at additional taxes, such as a carbon duty, as new sources of revenue.

Speaking to CNBC Wednesday, Dexter Thillien, a senior industry analyst at Fitch Solutions, said there are two reasons why tech giants could be asked to pay more.

"The first is that they will be the companies making the most money during and after the pandemic, and the second is because there have been many moves towards digital taxation," he said via email.

International plans for a digital tax

The OECD delayed a target to reach a digital tax plan to October from July. It also said earlier this month that the plan might be done in a staged process that lasts until 2021.

The European Commission has said that it will revive talks at the European level if there is no agreement at the OECD this year.

The same institution has previously said digital companies pay on average an effective tax rate of 9.5% in the EU — compared to 23.2% for traditional businesses. Tech giants have argued that they pay as much tax as they are legally obliged to. 

The European Commission has taken a leading role in regulating the tech industry. For instance, in 2016, the institution ordered Ireland to recover 13 billion euros in unpaid taxes from Apple. The company and the Irish government contested that decision.

After an online discussion with Facebook's CEO Mark Zuckerberg last week, European Commissioner Thierry Breton brought up the issue of taxation. He said on Twitter: "Being smart is good. But being too smart with taxes is never a right idea." The European Commission declined to comment Friday when asked to clarify the tweet and whether the institution is looking at changes to taxation.

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Taxing digital companies could move forward in other parts of the world too.

"Over a longer time-horizon, we see other countries beginning to explore digital goods and services taxes, particularly as the scale of the shift to digital commerce over the past several months of Covid-related dislocations becomes clear, and as a number of countries grasp to find new revenue," Livingston also said via email.

"A key trend to watch is the degree to which large consumer bases in emerging markets, such as Brazil, India, and Indonesia, press ahead with new digital taxes. Indonesia, for example, is trying to collect taxes on a greater share of its e-commerce," he said. 

VAT or income taxes could be an option too

Graham Samuel-Gibbon, an international tax law partner at law firm Taylor Wessing, said a digital tax doesn't provide "huge revenues" for governments as only a few companies are above the necessary threshold that require them to pay the duty.

On the other hand, taxes on consumption and income provide higher sources of government revenue, Samuel-Gibbon said.

However, he acknowledged that these two "would be less popular" among ordinary citizens.

France, Italy, Spain, Austria and the U.K. are some of the countries that have drafted plans for a digital tax.

In the case of France, which was the first major economy to legislate a digital tax, it agreed in January to postpone collecting the first payments until next year to allow time for the OECD to come up with a deal.

What is a digital tax?
What is a digital tax?