European Internet Tax Changes

February 18, 2013

EU Tax PieTax authorities across Europe are exploring a variety of modifications to tax laws in an effort to derive greater revenues from taxes on Internet activities and transactions.  Challenging economic conditions have led those governments to pursue all available options to generate greater revenues.  Many European governments believe that more aggressive taxation of online corporate earnings provides an extremely attractive vehicle for enhancing revenues.  These European tax initiatives are primarily directed toward large Internet companies such as Amazon and Google.  They can also significantly affect smaller businesses operating in Europe.

Efforts are underway to try to make the diverse national corporate tax policies across Europe more uniform to prevent companies from moving to jurisdictions providing the most favorable tax structure.  At present, Ireland is viewed by many companies as the most attractive tax haven in Western Europe.  Ireland applies the lowest corporate tax rate in Western Europe.  It also permits companies to shift a substantial portion of their profits to other low tax jurisdictions, such as Bermuda, a strategy not permitted by most other European nations.

Current tax policy has enabled Ireland to attract many Internet companies to locate their European headquarters in the country.  European Union tax authorities are attempting to find ways to reduce corporate tax disparities among the European nations, however, Ireland has indicated it has no intention to change its tax policy.

Several European governments are actively exploring additional taxes directed toward Internet companies.  For example, French and Italian tax authorities are reportedly investigating major Internet companies to determine if they have been systematically underreporting their income.

The British government is reviewing the tax implications of the sales and marketing operations of major online companies such as Amazon in Europe.  Motivated in part by strategic tax planning, Amazon located its European headquarters in Luxembourg, a jurisdiction with a low sales tax.  The company reportedly routes all of its European online sales through Luxembourg as a result of the low sales tax, and it pays affiliates in the different European countries to fulfill the sales orders.

Efforts to extract more tax revenue from Internet commerce are taking place in jurisdictions around the world.  The European experience illustrates that governments, starved for revenues, are likely to pursue more and more aggressive tax strategies.  Internet companies, large and small, are increasingly viewed as attractive revenue sources.

The incentive to place a greater tax burden on electronic commerce is understandable.  Efforts to increase taxes on Internet businesses should be tempered, however, by the recognition that excessively high taxes can impede economic activity, and can ultimately frighten away some important businesses.  It should also be noted that no matter what form tax policy takes, companies will always seek out the path which leads them to the lowest possible tax exposure.