In our discussions on the digital tax with government officials and parliamentarians, the sovereign right of the Czech Republic to impose taxes within its jurisdiction has often been raised. We do not view the digital tax as a matter of the sovereign right of the Czech government, or the sovereign right of the United States to impose reciprocal tariffs. Those rights are undisputed and respected. Our concerns lie with how companies will react to the tax and tariffs. The passage of a digital tax will force companies to make individual and independent decisions to protect their company from damage. The sum of all these decisions is likely to leave the Czech economy in a worse situation.
The introduction of a digital tax will not result in a significant change in the market share of companies operating in digital services. Digital services companies who must pay the tax will likely react by raising their prices. Czech companies will pay those higher prices. This will lower their corporate tax base. The digital tax, therefore, will likely make it more expensive for Czech companies to market their products, and shift the collection of public revenue from the corporate tax to the digital tax without much influence on the amount collected.
In addition, the US Trade Representative has announced its intention to place reciprocal tariffs on exports from countries with a digital tax. From discussions with exporters who are potentially impacted, they will face the choice of abandoning the US market or shifting production to Mexico, Canada or the United States to escape the tariffs. We expect most to make the latter decision. For the Czech Republic, either choice will mean loss of production, loss of jobs, loss of export revenues, and loss of corporate tax base.
As part of its proposed Recovery Plan, the European Commission has suggested a European Digital Tax. The OECD is also working on a solution for digital taxation which the Czech government has said will replace the Czech digital tax. That may mean the impact of the digital tax may be short term. If Czech exporters decide to shift production as a result of the tax, that decision will not be reversed by either an EU digital tax or an OECD solution.
In the end, the economic choice before parliament is whether to give Czech digital companies a tax advantage at the cost of 1) higher digital advertising for other Czech companies, 2) the potential loss of the US market for many Czech exporters (or the shift of those exporters’ production outside of the Czech Republic) and 3) lower public revenues. Such a consequence would harm the government’s efforts to recover from the pandemic, and the loss of leading exports would hinder progress toward becoming The Country for the Future.
We thank you for considering these arguments, and we are ready to discuss this further if you are interested.
The official letter in Czech is attached.
5th February 2021
1st December 2020
2nd February 2021
2nd November 2020