The art of taxation consists of plucking the goose so as to obtain the most feathers with the least hissing
This pearl of wisdom came from Jean-Baptiste Colbert, Louis XIV’s famed Minister of Finance. It is an axiom with which many of Colbert’s modern counterparts, from Paris to Pretoria, from Rome to Riga and from Warsaw to Washington might concur. In current times, though, rather than the people being the source of greatest plumage, it is corporations. More specifically it is large technology companies.
In the European race to tax US technology firms – colloquially known as GAFA – it is Colbert’s countrymen, the French, who appear to be in first. On 6 March 2019, the French Government submitted a draft bill to the Council of Ministers detailing their proposed tax on digital services. Its main feature is a single rate of 3%, levied on gross income derived from digital activities, for which French consumers have been deemed essential for creating value. In simple terms, this means a new tax on businesses with revenues over €750 million per annum, and who use targeted online advertising, sell user data or are online platforms. The last example includes business to business (B2B), businesses to consumer (B2C) or consumer to consumer (C2C) business models.
Furthermore, this draft bill has been submitted to the French Parliament under an accelerated procedure. As such, the tax will apply with retroactive effect, from 1 January 2019. It has thus become a central issue of importance in French policymaking. The speed with which France is advancing on this measure probably has as much to do with the ‘gilets jaunes’ and Macron’s attempts to shed the accusation that he is a President for the rich and big business, as it does about taxation unfairness. Nevertheless, there are four main justifications which are cited in France, Europe and worldwide, for why such a tax is needed.
The most prominent of these is that digital business models do not pay enough tax. A figure widely circulated is that they pay just 9.5% in corporate income taxes. However, this number – and a digital tax itself – has been publicly refuted by the author of that study. Online and digital enterprises pay an effective tax rate which is higher than that paid by traditional industries globally. Statistics from across Europe indicate that they pay a five-year effective corporate tax rate (ECTR – the actual amount of tax a company pays) average of 29.1%, whereas traditional corporations pay a 27.8% ECTR. If Silicon Valley had an unwavering focus on tax avoidance, they would have entirely shifted profits to tax havens. They have not done so. To suggest that digital companies do not comparatively pay their fair share of tax, is to ignore the market evidence.
There is also a prevalent suggestion that the large technology firms use tax base erosion techniques to keep their profits artificially low. It is frequently suggested that they use intangibles such as trademarks, databases, customer contracts, royalties, software, content and other means to reduce profit. Some quarters, particularly in the French Finance Ministry, have therefore suggested that to assess the actual worth of technology firms, it would be better to look at technology companies’ significant annual revenue and their high market capitalisation compared to book equity value (P/B ratio).
However, there is a problem with this line of thought. The statistical evidence suggests that digital service companies do not substantially use base erosion techniques to keep profits low. While it is difficult to draw a straight line between digital and non-digital firms, a number of studies have shown that profits for digital companies remain consistent with – or lower than – other industries. A Europe-wide paper indicated that publicly traded digital businesses had profitability on average 4.9 percentage points higher than non-digital firms. Moreover, their use of intangible assets remains somewhere in the middle across industries. Thus, to suggest that digital companies disproportionately use base erosion techniques to keep profits artificially low, is again an example of selectively ignoring evidence.
Third on the list of reasons for a digital tax, is the claim that data companies are guilty of profit sharing, whereby they move their intangibles to less judicious tax jurisdictions. Although GAFA are comparatively no guiltier of this than other industries, there is substantial evidence that digital companies do use this technique. The most high-profile recent example comes from Ireland, where Apple was forced by the EU to pay over €14 billion in previously unpaid tax and interest. The important point is that the tax was paid in Ireland, rather than other European countries where their products were consumed. This is because Ireland has a lower corporate tax rate than its European neighbours.
While profit sharing is an issue for the global tax system, the transient nature of intangibles is not a problem that any nation state, including France, can overcome unilaterally. Rather, attempts to reform global economic behaviour are invariably most effective when done collectively, on an international level. This can most notably be done through the OECD’s BEPS investigations, which are due to report in 2020. Global precedent shows that no country can act alone without some retribution from affected countries. It can lead to a cycle of reciprocal taxes, punitive trade policy and a general global political attitude of an eye for an eye. This is an approach which will only make the whole world blind.
Last on the list of reasoning for new digital taxes, is a nationalistic claim. This argument tends to be two-fold. Primarily, nations outside the US have a right to increased market share of GAFA taxation since their population contributes significantly to value creation. It is a suggestion which has been made repeatedly by French Economy Minister Bruno Le Maire, among others. However, there is also the accusation that GAFA pay far less tax in host countries outside the US than their domestic competitors. For instance, in the U.K. last year Facebook paid just £15.8 million of tax despite collecting £1.3 billion in sales. This equates to just 0.62% of their revenue in the U.K. By contrast, Experian, a U.K.-based credit analysis platform, paid £265 million in corporate tax, nearly 6% of its annual revenue figure.
However, this argument once again fundamentally misunderstands the nature of the international taxation system. Corporate tax is paid at place of origin rather than at destination. As noted earlier, any change to the global taxation procedure should occur on a multilateral level. If countries unilaterally, sporadically and inconsistently begin to change agreed global taxation practices across sectors, the result could be significant double taxation for many firms. Spotify could be taxed in Sweden and Indonesia, Alibaba in both China and France, and Deliveroo in the UK and the US. The result could be significant market manipulation, whereby the most prominent firms globally are those which have the greatest amount of national government support through exemptions to taxes domestically.
In conclusion, revenue-based digital taxes at place of consumption is a discussed topic the world over. In Europe, France is leading the way but other countries including the UK, Spain and Belgium have announced plans to follow their lead. In many ways it is an act of mercantilist protectionism that Colbert himself would have proud of in the seventeenth century. Indeed, his famous economic theory that fiscal policy should be used to get ‘cash from other countries, keep it inside the kingdom, hinder its export,’ and thus domestically people would gain ‘the means to profit,’ could almost have been written uniquely about the digital taxation plans. However, there are risks with this strategy at both extremes. The goose can resist plucking or there is a danger of overplucking and killing the means of production. Digital taxation is in danger of falling into both these traps.
See Question for written answer to the European Commission (E-005509-18) by MEP Wolf Klintz, accessed at: http://www. europarl.europa.eu/doceo/document//E-8-2018-005509_EN.html; ZEW, An EU Digital Tax Places an Unnecessary Additional Burden on Firms and Cannot Be in the Interest of Germany, 10 September 2018, accessed at: https://www.zew.de/en/presse/ pressearchiv/eine–digitalsteuer–fuer–europa–belastet–unternehmen–unnoetig–mehr-und-ist-nicht–im–interesse–deutschlands/
M. Bauer, Digital Companies and their Fair Share of Taxes: Myths and Misconceptions: ECIPE 03/2018. The higher ECTR figure for digital companies is largely due to the US corporate of tax being historically one of the highest in the OECD. (Prior to the 2017 Tax Act, which aligns the US to Western norms).
H. Lee-Makiyama, OECD BEPS: Reconciling Global Trade, Taxation Principles and the Digital Economy, ECIPE 02/2014.
H. Lee-Makiyama, M. Ferracane, The Geopolitics of Online Taxation in Asia-Pacific – Digitalisation, Corporate Tax Base and the Role of Governments, ECIPE, 01/2018; M. Bauer, Digital Companies and their Fair Share of Taxes: Myths and Misconceptions: ECIPE 03/2018.
M. Bauer, Digital Companies and their Fair Share of Taxes: Myths and Misconceptions: ECIPE 03/2018.