Czech Government Has Announced New Digital Taxation Regime

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Taxing digital giants is a hot topic. After the failure, so far, of attempts at European and international harmonisation in this area, the Czech government is introducing its own solution. The tax rate of 7% is the highest of any EU state , but the approach is different to other countries. Will it be effective? Photo: stock picture / Freepik.

Written by Charles du Parc

Czech. Rep, Aug 26 (JS) – The EU’s attempt, particularly advocated by France, to have a unified approach to digital taxation has failed for the moment. This was mainly due to worries about the United States regarding the taxing of digital businesses as discriminatory and therefore imposing retaliatory tariffs against the EU. This, however, has resulted in several countries, including the Czech Republic, pursuing individual approaches.

Why tax?

The main reason for taxing is to even up the playing field. According to the EU, digital businesses paid an average tax rate of 9.5 percent last year, whereas traditional businesses had to fork out 23.2%. A secondary reason is to make companies pay for the additional costs that arise from their activities to the public purse. Both Uber and Amazon,for example, impose significant extra demands on transport infrastructure.

What to tax?

Traditional corporate taxation focuses mainly on profits. With digital companies it is more difficult to identify where profits originate from and it is easier for digital companies to ‘relocate’ their profits. Those of you who use Amazon may have not noticed that although the goods may be shipped from the UK, Germany or the Czech Republic, the invoices are often issued by a Luxembourg subsidiary. Various countries have come up with different solutions: France and Austria want to tax locally generated revenue from online platforms such as Uber and online advertising businesses at the rate of 3% and 5% respectively; Slovakia is targeting foreign tax firms with traditional corporation tax by changing the way they classify tax presence and the UK plans a 2% tax of the value created in digital services businesses (social media, search engines, on-line marketplaces) by British users.

What is the Czech government proposing?

The Czech government has introduced legislation which it hopes will take effect in the middle of 2020. The proposal is for a tax rate of 7% on certain specified digital services. These are:

  • targeted advertising campaigns on a digital interface for users of that interface;
  • use of multi-sided digital interfaces that allow users to find and interact with other users;
  • sale of user data gathered from user activity on digital interfaces.

These will target  companies with a global revenue of over EUR 750 million which also have taxable services within the Czech Republic of 50 million CZK within a calendar year. “The digital tax will apply to the most important global players and respond to the failure of negotiations at an EU level to date as well as  the slow progress of the OECD’s global solution. The discussion is not about whether to introduce this taxation, but from when, in what form and in what amount. The Czech Republic will rank among the countries that have found answers to these questions. This sends a clear political signal to accelerate cooperation at the international level,” says Minister of Finance Alena Schillerová.

Lukáš Kovanda (Chief Economist at Czech Fund) worries that the Czech Republic will get caught up in a wider confrontation over digital taxation between France and the US which will lead to the US imposing tariffs on the whole of the EU.

Leonid Bershidsky, writing for Bloomberg thinks the Czech Republic has the right approach in targeting advertising based on personal data. Taxing clicks on adverts shown in a particular country will also require more disclosure of analytical data from the digital giants, increasing transparency. ‘ The Czech Republic is a small country, but it can set an example for its bigger neighbours and even for the U.S.’

The Czech Republic’s approach seems to attempt to address how the digital economy actually operates rather than to adapt traditional tax approaches to fit the digital economy. This must surely be the way forward.

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