The Czech Republic just joined an ever increasing list of countries who are introducing their own versions of the digital tax. Let’s explore this development in more detail.
Czech Digital Tax Proposal: Overview
The Czech Republic’s ministry of finance just announced that it will introduce by the end of May of this year a 7% digital tax. The exact details are not yet know, but it appears that the tax will affect mostly the large multinational companies – those that make at least 750 million euros in global revenue.
Czech Digital Tax Proposal: When the New Tax Will Become Effective
If passed into law (and this appears to be the case), the new tax will take effect on January 1, 2020.
Czech Digital Tax Proposal: Reasons for the New Tax
There are four reasons for the introduction of the new digital tax. The first and most obvious one is raising additional revenue. The Czech finance minister is hoping to raise at least 5 billion Czech koruna (or $22 million) on an annual basis.
The second reason for the Czech digital tax is the fact that the Czech government is reacting to developments (or lack thereof) in this area of international tax law. Despite this being an issue for some time now, the European Union (“EU”) and the Organization for Economic Cooperation and Development (“OECD”) have both failed to work out an international framework for digital taxation.
As Sherayzen Law Office has written previously, the EU discussion on the single digital tax is now completely stalled. There is a stubborn opposition to the existing proposals from many member states, particularly Ireland and Sweden.
Similarly, the OECD efforts to find a global consensus on the issue of taxation of the digital economy are progressing at a snail’s pace. In fact, there is no certainty whether the OECD will finalize this discussion any time soon.
The failure to reach an agreement at a supra-national level has already led some of the largest EU economies to adopt their own version of the digital tax. The recent examples include France, Italy, Spain and the United Kingdom. The Czech Republic does not want to be the last country to adopt a national digital tax and there is no hope for an immediate resolution at the EU level.
This leads us to the third reason for the current Czech legal action. The Czech government is sending a message to the EU to come up with a long-sought digital tax that would apply uniformly across the EU countries. Otherwise, the EU will not be able to act as an economic union with respect to the digital economy.
Finally, the fourth and related reason for the new Czech digital tax is the fact that the Czech government wants to position itself better for the EU negotiations on the taxation of the digital economy. Right now, the EU countries that are preparing to adopt a digital tax are in a better position to negotiate the final consensus that would be more beneficial to them vis-a-vis the EU countries which do not have anything in place.
It is not just a matter of better experience and more insight into the impact of a digital tax. The real issue is going to be the cost of tax harmonization. Since the EU countries without a national digital tax do not have any, the EU countries with a national digital tax will be able to argue that, in order to be fair, the final proposal needs to be closer to their national tax systems in order to reduce the tax harmonization costs.
In fact, the more countries that announce their own versions of a digital tax, the more pressure the rest of the EU states will feel to do the same in order to preserve their negotiation position.