France and Germany abandon digital services tax

The digital services tax (DST) is off the EU table for now. France and Germany told fellow EU finance ministers they accepted the controversial proposed tax on the digital giants had no hope of passing and that they would instead propose a reduced version of it – a tax on digital advertising, levied at 3 per cent on the big companies.

The ministers asked the European Commission to work on the new proposals and to return to Ecofin with them in January or February.

Minister for Finance Paschal Donohoe made it clear to colleagues that he "continues to have strong principled concerns about this policy direction", signalling a continuing Irish unwillingness to lift its veto on an issue that requires unanimity. Ireland has led the opposition to the DST.

This week’s decision means DST will not be on the agenda for the summit in two weeks, much to France’s disappointment. EU Commission vice-president Valdis Dombrovskis also expressed disappointment and said “it continues to be unacceptable that digital companies pay less tax than their brick and mortar rivals”. He called on member states to continue to work for a compromise.

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France’s minister for finance Bruno Le Maire described the compromise proposed by Germany and France as a step forward. “It’s a first step in the right direction, which in the coming months should make the taxation of digital giants a possibility.”

US giants

Le Maire said that if the tax were adopted, individual countries such as France would be free to impose it on a wider basis.

In practice the compromise means Google and Facebook will be the big firms captured by any EU-only measure. The two US giants dominate 75 per cent of digital advertising space. Amazon, Airbnb and Apple are likely to all get a reprieve.

Ireland has insisted that unilateral action on digital taxation by the EU would exacerbate transatlantic trade tensions and that the EU should await global proposals due from the OECD next year. “As other countries mentioned the right and the safest way to deal with this is through the OECD to find consensus on global matters,” Mr Donohoe told fellow ministers. “Ireland will engage constructively over the coming weeks and months.”

Employers group Ibec welcomed the decision, saying “the drive from some member states towards unilateral solutions to the taxation of the digital economy has been a major concern for Irish business”.

Ecofin meeting

Eurogroup ministers had met in a marathon session overnight ahead of the Ecofin meeting on Tuesday. After months of negotiation they agreed on the final elements of a package of economic and monetary reforms that will strengthen the euro and the banking system and can now go forward to leaders at the summit on December 13th.

The package includes the further development of the instruments and the role of the European Stability Mechanism (ESM), the operation of the common backstop for the Single Resolution Fund (SRF), and possible instruments for competitiveness, convergence and stabilisation in the monetary union.

Negotiations

The last element, a partial victory for the French, refers to the establishment of a budget for the euro area. Its size will be determined in the lengthy and difficult negotiations over the next budget.

The shape and mandate of such a budget is to be agreed, but Ireland and other members of the Hanseatic League group are determined that it will be limited and operate as an insurance policy-like stabiliser on very strict conditions and for those who strictly abide by EU budget rules.