20 February 2019

Do European companies pay their fair share of tax? Many companies headquartered in France, Germany, Italy and Spain show very low effective corporate tax rates (ECTRs). Their effective tax rates are often much lower than those of digital corporations, including the largest tech companies headquartered in the United States.

The high level of variation in ECTRs demonstrates that EU governments de facto endorse large European companies’ “tax saving” behaviour. In other words, EU governments actively encourage EU-based companies to lawfully reduce their global tax bills.

New special taxes on digital services companies fail to address the central problems of Member States’ corporate tax codes. The political campaign for an EU-wide Digital Services Tax (DST), spearheaded by vocal parts of the European Commission (DG TAXUD) and the European Parliament (predominantly the Socialists and Democrats), distracts public attention away from tax exemption rules that have been implemented to benefit Europe’s large traditional companies.

A new complex layer of corporate tax code for digital companies would further undermine tax honesty and accountability on the side of EU governments. Special taxes on digital services would render the EU’s tax system even more complex without tackling the real problems in national and international corporate taxation.

Policymakers in the EU should be concerned about the significant long-term economic implications of any tax on individual and corporate business activity, including the commercial activities of micro businesses and small and medium-sized companies. Any politician concerned about fairness and accountability should be particularly wary of the path dependency in corporate taxation, i.e. the historical pattern that tax complexity breeds further tax complexity, effectively taking corporate tax rules out of the control of elected lawmakers.