Nordics block European Commission tech tax levy to protect digital investment

Nordic solidarity proved a formidable force in March, when it helped alter the course of a European Commission (EC) proposal to introduce an EU-wide digital services tax.

The three Nordic EU-member states stood in solid opposition to the EC initiative, enlisting support from other small-nation EU members to block the move.

The steely determination exhibited by the Nordic-bloc underscored their resolve to protect ambitious plans to scale-up efforts to attract global tech giants and investments. Nordic governments view digital investments, particularly in the datacentre domain, as key to driving future economic growth.

The blocking role played by the Nordic alliance was all the more significant given that all three EU-states continue to develop competing and individual inward investment strategies to lure tech companies. Moreover, all three countries have become intense rivals in crafting competitive tax-friendly inward investment strategies to lure digital tech investments to their shores.

The EC’s reverse-course decision in March proved a substantially positive outcome for the Nordic-EU states. Faced with mounting opposition from the Nordic-bloc, and EU ally nations such as Ireland and Luxembourg, the EC reversed course and adopted a Nordic proposal to achieve a common global digital tax solution in cooperation with the Organisation for Economic Cooperation and Development (OECD).

The OECD is hoping to reform digital taxation worldwide in a bid to close many of the loopholes that multinational companies use to reduce their tax charges. The Nordic-bloc is eager that progress can be made through this channel as the EC has warned that it will revisit the digital tax levy proposal should the OECD”s reform plan stall or get bogged down in lengthy delays.

Led by the Danish, Finnish and Swedish finance ministries, the Nordic-bloc’s fundamental concern was that the EC’s digital tax plan, if it had proceeded, could have seriously damaged national investment and economic growth prospects going forward. In particular, Nordic governments feared the EC digital levy proposal might restrict their capacity to capitalise on existing tax friendly incentives that all three countries offer to foreign digital tech startups.

The Nordic “pushback” was motivated by the need to protect national interests by finding an equitable and efficient digital tax solution that could be applied uniformly and on an international basis, said Magdalena Andersson, Sweden’s finance minister.

“We want the Nordic countries and the rest of the EU to remain competitive in an increasingly interconnected and digital word. If the EU unilaterally applied a digital services tax on gross income, including to non-EU firms, the tax would be difficult to enforce and could pose a substantial risk by complicating international cooperation in the tax area,” said Andersson.

Moreover, the Nordic-bloc lobbied for a greater level of collaboration between the EU and the US to find workable digital tax solutions with the aim of creating a level playing field between American and European companies.

The US included a Global Intangible Low Tax Income (GILTI) provision in its recent tax reform to tackle tax avoidance by American companies in the digital sector. The reform proposes the levying of a minimum 13% tax on tech company profits from foreign sales.

The EC’s proposal, which had the support of Germany and France, envisaged the levying of a 3% tax on the gross income of digital services. The initiative sought to constrain the ability of tech companies to earn large-scale profits by limiting or finding loopholes to circumvent taxation codes by relocating their corporate headquarters to tax-friendly states within the European Union.

A number of EU countries, including Germany, France, Spain and Italy, remain engaged with the idea of introducing some form of a digital tax levy at national level over the next two to four years.

Closing loopholes

Interestingly, the Nordic-bloc approach to the digital services tax appears out-of-step with near non-EU neighbour Norway, which is examining possible new measures to tighten taxation rules. Specifically, Norway is hoping to close loopholes to ensure that digital tech multinationals like Google, Microsoft, Amazon and Facebook are required to pay their fair share of tax.

“We are most concerned about establishing confidence in the tax system. It’s imperative that we have a system that functions for all types of companies,” said Hans Christian Holte, Norway’s director of taxes and the chair of the OECD’s Forum on Tax Administration.

Petteri Orpo, Finland’s finance minister said digital will continue to drive innovation, research and development in the Nordic economies. “We must be mindful of the need to balance the need for a digital tax and creating value for businesses and growth in our economies,” said Orpo. “The priority must remain that we provide a favourable climate for business by not reducing the incentives that states offer to promote and attract tech investments. We need tax fairness in the digital economy.”

The Nordic region is fast becoming a hub for large-scale digital investments by global companies. Tech giants like Facebook, Google and Microsoft are being lured by a combined offering of low cost sustainable energy and tax-friendly incentives. The scale and capital spend on investments continues to grow.

Google, which also plans to build a €600m datacentre in western Denmark, is investing €600m to build a new datacentre at Hamina in Finland. Google opened the first of two datacentres in Hamina in 2011. The new server farm project will bring Google’s total capital investment in Hamina to €1.4bn.

“The demand for Google’s services grows daily,” said Antti Järvinen, Google’s country Mmanager in Finland. “We need to build our datacentre infrastructure to meet this need. This in turn has a positive impact on Finland’s economy and own digital infrastructure.”

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