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Alexander Rust

Huge in­ter­net com­pan­ies like Face­book, Google, and Amazon pay on aver­age less than 10% cor­por­ate tax in the EU, in spite of enorm­ous rev­en­ues. In com­par­ison, tra­di­tional com­pan­ies pay more than double that amount. The EU wants to change this, and has put the tax­a­tion of di­gital com­pan­ies on the agenda dur­ing Aus­tria’s EU Coun­cil pres­id­ency. WU tax ex­pert Al­ex­an­der Rust is crit­ical of these plans, however, and warns of far-reach­ing con­sequences.

Un­der the cur­rent laws, com­pan­ies pay cor­por­ate tax only in the coun­try in which they have a phys­ical pres­ence. Tax­a­tion in other coun­tries is only per­miss­ible if the com­pany has pro­duc­tion fa­cil­it­ies in that coun­try. Di­gital ser­vice pro­viders like Face­book don’t have this type of pro­duc­tion fa­cil­it­ies, and their seats are re­gistered mostly in tax havens like Ber­muda, the Cay­man Is­lands, Ire­land, or Cyprus, al­low­ing mul­tina­tional com­pan­ies like Google, Face­book, or Amazon to keep their tax­a­tion levels ex­tremely low. The EU is now con­sid­er­ing a di­gital tax, which would make com­pan­ies sub­ject to tax­a­tion in the coun­tries where they do busi­ness. WU tax ex­pert Al­ex­an­der Rust from the In­sti­tute for Aus­trian and In­ter­na­tional Tax Law thinks this le­gis­la­tion would be very dif­fi­cult to im­ple­ment, and det­ri­mental to Aus­tria in the long term. His re­search fo­cuses on es­tab­lish­ing a level play­ing field in the com­pet­i­tion between di­gital and tra­di­tional com­pan­ies in Aus­tria and abroad.

Ma­jor changes to tax law ne­ces­sary

Rust’s stud­ies show clearly that one of the main chal­lenges will be de­fin­ing “di­gital com­pan­ies.” The crux is article 5 of the OECD Model Con­ven­tion with Re­spect to Taxes on In­come and on Cap­ital, which defines “per­man­ent es­tab­lish­ment,” i.e. a com­pany’s phys­ical or brick­-and-­mor­tar pres­ence in a coun­try. “The main prob­lem is that many com­pan­ies deal both in di­gital and phys­ical products. From Amazon, for example, cus­tomers can buy a CD or down­load a di­gital copy of the same music, but there are much more com­plex situ­ations, as well. Spe­cial reg­u­la­tions for di­gital ser­vices will res­ult in massive prob­lems with clas­si­fic­a­tion,” ex­plains Rust. In the in­terest of equal treat­ment, a “di­gital tax” would even­tu­ally lead to tax­ing tra­di­tional com­pan­ies in their cus­tomers’ coun­tries, even if they don’t main­tain a phys­ical pres­ence there, ac­cord­ing to Rust. This would mean a com­plete over­haul of in­ter­na­tional tax­a­tion laws.

Bad for ex­port coun­tries

Rust also feels that too little at­ten­tion has been paid to the fact that these changes would res­ult in massive losses in tax rev­enue for coun­tries like Aus­tria, who de­pend heav­ily on ex­ports. Ex­ports ac­count for over 50% of the Aus­trian gross do­mestic pro­duct. Cor­por­ate tax should be paid in the coun­try where the value is cre­ated, as con­sump­tion in the users’ coun­tries is already taxed through VAT. A di­gital tax would de­vi­ate from these prin­ciples and shift tax rev­enue from the coun­try where value is cre­ated to the coun­try where the pro­duct or ser­vice is con­sumed.