The EU must tread carefully with the threat of a European digital tax

Ursula von der Leyen has raised the possibility of imposing a tax on the advertising revenues of American digital giants if trade negotiations with Donald Trump fail.
The idea is not new. The European Union has long complained that GAFAM companies do not pay a fair level of tax in Europe. Due to the dematerialised nature of their services, these companies largely escape corporate tax, which is traditionally based on physical presence. As a result, they pay much less than traditional companies.

In an attempt to remedy this situation, the Commission had already proposed a digital services tax in 2018. However, in the absence of unanimity among Member States – a requirement in tax matters – the proposal failed. Several countries, including France, then introduced their own GAFAM tax. These national taxes are still in force. All the major EU states, with the exception of Germany, apply one, with varying scopes but a common principle: taxing revenue from digital services based on the number of users as an indicator of the value generated.

So should a European tax be created? The idea has several advantages. It would harmonise tax rules within the EU and offer a promising source of funding for the European budget at a time when digital revenues are growing rapidly (between 2017 and 2023, digital advertising revenues in the European market increased by 156%).

But introducing such a tax in the current context carries risks. Upon his return to the White House, Donald Trump signed executive orders mandating retaliatory measures against any country that adopts a digital services tax. A European tax could therefore provoke retaliation. And unlike customs duties, digital taxes are the subject of broad bipartisan consensus in Congress: they are perceived as discriminatory against American companies and as a direct threat to US tax revenues.
The most significant risk, however, would be to permanently compromise the global agreement on the taxation of multinationals, negotiated under the auspices of the OECD. Signed in 2021, this agreement aimed to provide a comprehensive response to the tax challenges posed by large companies. The Biden administration had agreed to it in exchange for a commitment from European countries to abolish their national digital taxes once the agreement was fully implemented.

Admittedly, it seems unlikely that Trump will revive multilateral momentum, but the EU should not close the door to future cooperation in the event of a political turnaround in the United States. Furthermore, the Trump administration categorically rejects ‘pillar 1’ of the agreement, which provides for taxing digital giants in the countries where their users are located, but remains open to renegotiating ‘pillar 2’, already applied in Europe, which would allow Member States to recover a share of the tax revenues of companies whose effective tax rate is below the global minimum of 15%.

The European Union will therefore have to handle the threat of a European digital tax with care: using it as leverage in trade negotiations, while showing its willingness to abandon it if Washington agrees to reopen discussions on an international tax agreement.