How would an EU Digital Levy impact startups?

April 15, 2021
Digital Levy

Going global is in startups’ DNA, they create products designed with a global mindset and their objective is to compete internationally. A conducive environment for global innovation is one in which policy makers strive to avoid fragmentation so that startups only have to scale-up once.  For that reason, we’ve always been supportive and have called for a digital taxation framework at the level of the Organisation for Economic Cooperation and Development (OECD) which has the potential to harmonise digital tax across borders. 

For the last few years, the OECD has attempted to bring 137 countries together to provide a taxation framework to reflect the growing internationalism of the digital economy. Difficult discussions and the postponement of the talks due to COVID-19 has driven the European Commission to propose a new digital levy. The EU is expected to propose a directive in Q2 of 2021. 

Tied to this, the European Commission published an open consultation for the public to give feedback on. Here are three principles we shared in our Commission’s consultation response that should apply to any form of digital tax agreement: 

Tax profits, not revenues:  Many startups aren’t profitable for years as they pour everything, their time and capital included, into growth and innovation. Sometimes even larger scale-ups are not profitable for a while. For that reason, it is paramount for the Commission to consider profitability when assessing the minimal economic activity of a company. Taxing revenues is akin to a growth tax which will disproportionately burden startups. Taxing profit will allow innovation to grow first. 

Taxation shouldn’t hinder innovation: Thresholds have a tendency to hamper innovation as they discourage startups from scaling up. Should the EU decide that thresholds are a necessary policy instrument, we would encourage the commission to set the threshold as high as possible, which will allow startups to scale-up. 

The unintended consequences of digital taxation for startup ecosystems: Although the digital levy may in theory be targeting bigger players, we know from experience that digital ecosystems are highly interconnected and that the costs for big multinational digital companies will be passed on to SMEs and startups. 

The OECD itself has urged the EU to postpone a digital tax levy as unilateral measures will undermine a global agreement. Fragmented digital taxation would create additional compliance procedures and could even lead to double or more taxation for some businesses and startups. Undercutting the OECD process on the EU level would introduce the fragmentation it claims it is trying to resolve at a time where the economy is already under significant strain. Uncoordinated and unilateral measures will harm not only startups but the economy at large.  We want to encourage the Commission to throw its weight behind the OECD talks to ensure an agreement is decided soon. 

You can review our consultation response here