Warsaw, 26th November 2018
Position of the Union of Entrepreneurs and Employers on the digital services tax
On 21st March 2018, the European Commission presented a proposal on taxation of digital economy. The Commission presented both a short-term measure – Digital Services Tax (DST) – and a more comprehensive, long-term proposal. In this letter, we will not refer to the latter proposal of a long-term solution regarding the taxation of international Internet operations.
We would like to focus on the short-term proposal. In the light of the lack of international consensus on taxation of digital activities, the European Commission put forward a proposal providing for the imposition of a temporary special-purpose tax – DST – of 3% on the revenues of enterprises from:
- sales of online advertising space,
- data generated by users,
- digital brokerage services that enable users to interact with each other.
The tax to be paid in Member States, where the users are located, would apply to companies whose annual revenues generated on the international market exceed EUR 750 million and EUR 50 million on the EU market. Although the vast majority of members of the Union of Entrepreneurs and Employers – ZPP are companies from the SME sector that do not achieve the revenues assumed by the EC, we believe that the new tax will affect these enterprises. We are afraid that the tax will be transferred through digital platforms to European citizens and entrepreneurs, which in turn will increase their operating costs, reduce their competitiveness, and their ability to innovate.
The SME sector is responsible for most of Poland’s economic growth. There are over 2 million entrepreneurs employing up to 250 employees. They generate over 60% of GDP and are responsible for over 70% of jobs – almost 3 out of 4 Poles work in such companies. For these enterprises, the Internet is not only a way to attract customers, but also is indispensable for their competitiveness. The main benefits achieved by SMEs on the Internet include, among others:
- reduction of costs of locating and purchasing materials, parts and other necessary resources,
- improved efficiency of production and delivery of goods and services by maintaining lower stocks in warehouses or better cooperation between designers of new products working in different (usually remote) locations,
- lower costs and increased customer service efficiency,
- increased competition in many markets, which necessitates the implementation of ever more modern solutions allowing for further reduction of costs and increase in the efficiency of operations,
- faster and more efficient flow of information within the organisation as well as more efficient communication with external partners,
- enhanced flexibility of work, new methods of work management increasing the efficiency of employees,
- new technical and IT solutions improving work in the organisation and reducing infrastructure investments (e.g. remote teams, working in the cloud etc.).
Pursuant to the above-listed benefits, SMEs can compete with the largest market players as well as offer better and more innovative services and products.
The Union acknowledges that although the new regulation is not directly targeted at SMEs, it will affect their activities. We believe that decision makers should consider the risk that the additional costs resulting from the operation of digital platforms will be transferred to European citizens and entrepreneurs. Such an expected increase in costs from operations conducted on the Internet, which is an increasing part of their functioning, will increase their operating costs. This is confirmed by the OECD’s “Tax Challenges Arising from Digitalisation – Interim Report 2018”, which noted that “an interim measure will increase the cost of capital, reducing the incentive to invest with a resulting negative effect on growth”. It also adds that “a measure only applicable to digitalised sectors risks slowing down investment in innovation for those businesses that are subject to the tax or indirectly affected by it”.
This is particularly important in the absence of an international tax agreement. The unilateral imposition of a digital tax on European enterprises, in the absence of such a tax in other parts of the world, will negatively affect the ability of Polish and European companies to compete with non-EU entrepreneurs (e.g. from the Americas, China or India). As a result, if future revenues are taxable, potential investors, e.g. in a technological startup company, will be willing to lower the proposed valuation and the chances of finding an investor in the company will decrease. We would like to point out that the increase in operating costs applies not only to technology companies, but to every entrepreneur who operates on the Internet. The new tax will increase the costs of marketing, advertising or reaching new customers.
The assurance of EU decision-makers concerning the steps taken to prevent the burden being passed on to SMEs is not credible in our opinion. We would like to remind that the entry into force of the General Data Protection Regulation was supposed to hit big Internet corporations, and recent analyses have shown that the largest adjustment costs are borne by small and medium enterprises. Big corporations employing hundreds of well-paid lawyers will always manage. Besides, that it is difficult to mitigate the risk of transferring costs to clients / SMEs was shown in the case of the bank tax, which was also to be a burden for banks and was transferred on to their clients.
Additionally, the Internet economy sector is one of the most innovative and fastest growing parts of the Polish economy. ZPP fears that the increase in costs associated with running a business will negatively affect the innovation of these companies and, as a result, will reduce Poland’s economic growth.
Furthermore, it is estimated that when determining a 3% tax rate, the new tax could generate EUR 5 billion per year for Member States. However, the EC did not present what part of these funds would be allocated to Poland. The Union expresses its concern that the expected fiscal effect will not offset the negative effects on the Polish economy.
In view of the above, we call on the Polish authorities, in particular the Ministry of Finance, which represents Poland in these negotiations, to present analyses how the new burden will affect the SME sector and impact its competitiveness. We believe that any proposals for introducing new business taxes must be supported by credible, public evidence, not only regarding fiscal and budgetary influence, but also analysing the broader economic context, such as competitiveness, innovativeness of the economy and economic growth.
The Union of Entrepreneurs and Employers believes that only after carrying out the above-mentioned analyses, Poland will be able to fully deliberately decide on further steps regarding the so-called digital tax.