Thursday, March 22, 2018

The EU's digital tax bill would burden COUNTLESS tiny app developers around the globe

I couldn't google a single article or statement higlighting the two ways in which even small mobile app developers will be affected by the digital tax the European Commission proposed on Wednesday (see yesterday's post and an October 2017 piece), so I'll just explain the problem here.

Most of the reporting and commentary on yesterday's Commission initiative is limited to one of the two proposals that were made simultaneously: the interim bill. On the EU Commission's website you can see that the March 21 announcement involved TWO DIFFERENT "Proposal[s] for a COUNCIL DIRECTIVE." The first one is a bill "on the common system of a digital services tax on revenues resulting from the provision of certain digital services" (PDF), and I'll refer to this as the "interim bill" so as to distinguish that short-term transitional set of rules from the actual mid-term plan, which is a bill "laying down rules relating to the corporate taxation of a significant digital presence" (PDF). The interim bill is intended to be replaced by the actual bill whenever the latter takes effect--and the EU wants its member states to begin working on both immediately.

At yesterday's Commission press conference, and in most of the media coverage, the focus was just on the interim bill. The interim bill is narrower than the actual bill in the following two ways:

  1. The interim bill has very high revenue thresholds, which all by themselves limit the number of companies potentially affected. We're talking about (as a power of ten) a hundred companies.

  2. The interim bill also defines the types of taxable revenues far more narrowly. That's why its title refers to "certain digital services" (emphasis added). Basically, the interim bill requires companies to sell user data or provide an advertising interface. It doesn't mention subscription revenues, for instance.

There's an "impact assessment" in either proposal, but I couldn't find any reference to mobile app developers. However, either bill specifically lists apps among the types of "digital interface" the tax proposal relates to. Article 2(3) of the interim bill and Article 3(2) of the actual bill are identical:

"'digital interface' means any software, including a website or a part thereof and applications, including mobile applications, accessible by users" (emphasis added)

Also, either bill defines user as "any individual or business."

Contrary to just targeting the likes of Google and Facebook, a huge number of app developers around the world will be affected by what the EU is trying to do. (Whether the EU will ultimately get anything done remains to be seen and is doubted by some.)

There are two ways in which even countless small app developers would be affected if the EU got its way. The first way requires you to have a significant (but not huge) number of users, and then the money you will have to spend on accounting and tax advice services will hurt most of you even more than the actual tax. The second way will affect many of you regardless of the exact number of users you have in the EU because Apple and Google would most likely pass certain costs on to you. The second way doesn't place an administrative burden on you, but it, too, costs you money.

  1. The actual bill would (if passed) affect you if your app has more than 100,000 users during a fiscal year in a particular EU member state. There are many apps out there that have more than 100,000 users in a country like Germany (more than 80 million inhabitants), France, or Italy (the latter two each have more than 60 million people).

    If you have more than 100K people using your app in a given year (as the sum of first-time users who just downloaded and recurring users from previous years), the bill would (if passed) apply to you even if your revenues were minimal! Article 4(3) of the actual bill defines a "significant digital presence" (the basis for falling under the new EU digital tax) as existing if "one or more of [three] conditions is met," so it's sufficient if (regardless of the other two thresholds, which relate to revenue levels and the number of formal business contracts) "the number of users of one or more of those digital services who are located in that Member State in that tax period exceeds 100 000."

    You know what this means in practice? You would have to file a tax declaration with the tax authorities of one or more EU countries such as Germany, France, Italy, whatever. For small app developers, the administrative effort of having to do this, in a foreign jurisdiction and language, and the potential cost of requiring expert advice (from accountants, tax advisers, or tax lawyers) would be a very significant burden.

    This fact alone shows that the EU's proposal is half-baked at best, insane at worst, and displays gross incompetence and an anti-business ideology. That's why I found it so telling that the EU commissioner who appeared at yesterday's press conference used to be a member of a radical communist group. His Trotskyist (that's the most radical denomination of communism) friends must be proud of Mr. Moscovici.

  2. Even if you don't have 100,000 users in a given EU member state during a fiscal year, and even under the interim bill, the EU's proposal(s) would (if passed) cost you money!

    That's because of how Apple and Google will be affected directly, with us app developers being affected indirectly. What's explained in the remainder of this post is unrelated to your number of users or your own revenues.

    • Under the actual bill, Apple's App Store and Google's Play Store revenues (whatever users pay for paid apps or in-app purchases) would be subjected to the EU tax.

      Just like we are paid our 70% (or 85% for qualifying subscriptions) of ex-sales-tax/ex-VAT revenues, the EU tax will then further reduce the revenues of which we receive 70% or 85%.

    • Under both the actual bill and even the interim bill, those of us generating in-app advertising revenues through Google AdMob would be affected, whether we're Android or iOS developers.

      I love Google's mobile advertising services, both as a great vehicle for acquiring users (I have an amazingly attractive cost per acquisition through Google AdWords because of a very effective HTML5-based playable ad, which Google uniquely empowers me to run) and as an app monetization vehicle (all ads shown in my app--banners, interstitials, videos, playable ads--are served by Google). I'm so grateful for the great support I've received from Google that I won't comment publicly on Oracle v. Google anymore (my positions on API copyright are still the same but I won't reiterate them).

      Google is the number one target of the EU's digital tax plans, so if the EU got its way, my own ads in the EU and my revenues generated through showing ads in my app to EU users would be affected.

      My ads in the EU would become more expensive, and my ad income in the EU would be reduced. Again, even under the interim bill, not just the actual bill.

    • What I just explained would affect not only Android, but also iOS, app developers relying (like I do) on Google's advertising services. In addition, iOS app developers would be affected with respect to their placement of Apple Search Ads. I don't know whether Apple's Search Ads business alone meets the revenue thresholds in the interim bill (50 million euros a year in the relevant market), but it undoubtedly would fall under the actual bill (the number of App Store users alone would take care of that, and the related revenue threshold would only be 7 million euros). So Apple would have to pay the EU digital tax on its European Search Ads revenue. It appears (based on comments on discussion boards) that Apple Search Ads are already a key part of the advertising mix of many app developers. I tried them for a short while and for my app they worked out a lot better than non-interactive Facebook ads and AdWords text ads, but I'm not using them anymore since Google AdWords delivers several times better results thanks to the playable ad format, which Apple doesn't support. But my situation is almost unique. For most app developers it's actually a heaven-sent opportunity to advertise their apps directly on the App Store, and that advertising vehicle would become 3% more expensive as a result of the EU's plans.

What the EU has in mind is bad for app developers everywhere in the world, whether they're based in the EU or outside. At the end of the day, this will affect EU consumers. But I can't think of a single pro-consumer initiative the EU has ever taken apart from the laudable exception of abolishing mobile phone roaming charges...

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