August 22, 2019 / 10:11 AM / 2 months ago

Breakingviews - Breakdown: The global fight over Big Tech’s taxes

LONDON (Reuters Breakingviews) - Who gets to tax Google and Facebook? That’s the kernel of a highly technical debate going on between 130 countries via the Paris-based Organisation for Economic Co-operation and Development. Major European governments want more cash from Big Tech groups, but the Americans are likely to resist. It makes a self-imposed 2020 deadline tricky - and raises the possibility of uncoordinated local levies followed by punitive U.S. countermeasures.

An activist wearing a mask depicting Facebook's CEO Mark Zuckerberg demonstrates during the European Union finance ministers meeting, outside the EU headquarters in Brussels, Belgium, December 4, 2018.

WHO DECIDES WHERE MULTINATIONALS PAY TAX?

Companies pay tax where they report a profit. But that’s often different to where their actual sales take place, since they can allocate profits to subsidiaries elsewhere. Globally agreed rules on this profit-shifting are supposed to ensure tax is paid where a company’s economic value is created, for example through investment in physical assets or intellectual property. The results can be odd in the digital world.

Imagine Coca-Cola buys digital-advertising space from Alphabet-owned Google, and that a Paris-based user clicks on the ad, generating income for the Silicon Valley-based group. Where does it owe corporation tax? The only money changing hands is between two American-headquartered companies. Meanwhile Google may declare the income through a subsidiary in Ireland, whose low corporate tax rate has led many U.S. tech groups to establish European hubs in Dublin. So, counterintuitively, Google could owe very little tax in France - even though that’s where the clicking and viewing of the ad took place, and even though Google’s local staff could have facilitated the ad purchase.

PRESUMABLY THE FRENCH HAVE A PROBLEM WITH THIS?

Bien sûr - as do the Brits, Germans, Spanish, Italians, Indians and other major economies, all of which are now trying to hash out a better system through the OECD. 

There’s a huge dose of self-interest, of course. Apple, Microsoft, Alphabet, Facebook and Amazon will generate a combined pre-tax profit of $192 billion this year, using Refinitiv estimates. And unlike, say, the retail industry, their income is growing at a rapid clip. Finance ministers like France’s Bruno Le Maire sense that now is a good time to grab some of that potential tax income, particularly with Big Tech’s reputation battered by data-security scandals.

Still, there’s also a point of principle at play. European Commission figures suggest international digital businesses pay a 10% effective average tax rate across the bloc’s 28 countries, compared with 23% for companies whose business models are mostly non-digital. This discrepancy, which partly stems from old-fashioned concepts like “physical establishment” in tax law, represents an unfair advantage for asset-light tech groups, the bloc has argued.

SO WHAT ARE THE NEW IDEAS?

It would almost be quicker to list the proposals not under consideration, so numerous and varied are the submissions being studied by OECD wonks. Their programme of work is replete with choice tax jargon like “fractional apportionment” and “modified residual profit split”. But there’s a common gist: technology companies should pay tax partly based on where their users are, rather than simply where they have a permanent establishment.

Britain’s finance ministry, for example, put out a position paper last March arguing that user participation creates value for technology groups like Facebook. When you post a link or personal information on the $524 billion social media giant’s website, you’re helping to create part of the product that advertisers are ultimately buying. That value should somehow be taxed, the Treasury argued. Another approach, also under consideration at the OECD, would be to allocate taxing rights partly according to companies’ local marketing and sales activity, as well as data they hold on customers. 

IS DONALD TRUMP OK WITH THIS?

It’s unclear whether the U.S. president has read the numerous policy documents put out by European finance ministries and the OECD. He has, however, noticed the emergency measures France and Britain have legislated for in case the international talks fall apart. The two countries may follow Spain and Italy by slapping a 2-3% levy on local digital-service revenue, predominantly targeting U.S. tech giants, if the OECD negotiations fail. Trump has threatened tariffs on France in response, and said Britain might not get a sought-after post-Brexit trade deal unless the planned tax is withdrawn. 

SO, WILL THE OECD PROCESS SUCCEED?

Ask 10 tax experts and you get 10 different predictions, but many agree a self-imposed 2020 deadline looks ambitious. 

Part of the problem is that Trump’s 2017 U.S. tax bill, which slashed the headline corporate rate to 21% from 35% and introduced penalties on companies that shift earnings abroad to lower their tax bills. That looked very much like a play to grab a bigger slice of the Big Tech groups’ taxable profit and bring it back home. Other countries are now effectively reaching for the same piece of pie.

A final problem is that governments from Europe to India sense that it is good politics to hammer digital behemoths right now. That gives them little reason to settle for a token compromise; France reckons its backup plan of a unilateral digital tax could bring in 500 million euros. An American Treasury official, meanwhile, said in June that the OECD process should “focus on reallocating out of above-normal profits” - code for “let’s not try anything too radical.” The global fight over Big Tech’s taxes may have only just begun. 

Breakingviews

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