The government's proposed tax on digital services is moving through Parliament just a few days after France announced it will step back from immediate implementation of its own very similar digital tax. The French decision to alter its approach came after the United States made it clear it would impose retaliatory tariffs.
As proposed, a narrowly defined group of global digital services companies would be taxed 7% of their Czech revenues. The US government protested that the French tax violated principles of taxation by taxing revenue instead of income, being extraterritorial (ie, taxing activities outside of national borders) and discriminating against American companies. Each of these arguments also apply to the Czech tax. We can assume a Czech tax will mean reciprocal tariffs on Czech exports to the US. That could mean the close of some Czech companies US operations.
"This tax is a real threat to our business," says Tomáš Kolář of Linet. "We understand the principles of fairness the government is pursuing. But we think that in reality the Czech government is swinging at the global digital service companies and hitting the Czech economy."
Is the tax worth that cost? We estimate the tax revenue generated by the tax to be lower than anticipated. Why? The targeted digital companies will pass the cost of the tax on to their Czech customers in the form of higher prices. the higher prices will cut into Czech customers revenue and income, which will reduce how much tax they pay.
The reciprocal tariffs will likely reduce revenues for Czech exporters. That, too, will lower tax revenues.
In sum, the benefits for the public budget are likely to be minimal and could be negative if the tariffs make some Czech exports uncompetitive in the US. Czech companies wishing to market their products online will face higher costs. Czech exports to the United States could sustain a big and lasting hit.
Deputies in Parliament are beginning to recognize the possible consequences. One submitted a proposal to reduce the tax to 5%; another suggested 3%. That might reduce the collateral damage on Czech exporters, but it will not eliminate it. The best economic solution is to find an approach which persuades digital services companies to pay a fair share of taxes in the Czech Republic without risking exports to the US.
"We are hoping that we can find a solution that gets us closer to everyone paying their fair share of taxes, while avoiding any damage to Czech exporters or the reputation of the country as a stable and predictable place to invest," says AmCham board lead on digital tax Alan Rassaby of Avast. "Some good progress has been made since the beginning of the year, and we hope the government will find the right solution in the next few weeks."
2nd November 2020
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