The EU's tech tax is a failed experiment waiting to happen

The EU's tech tax is a failed experiment waiting to happen
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Ten European nations, including the United Kingdom, France, Germany, Spain and Italy, have called for a new "equalization tax" supposedly intended to single out large multinational tech companies. The proposed tax is driven by perceptions that companies including Google and Amazon don’t pay their fair share in taxes within Europe by using complex structures to divert profits to low taxing countries such as Ireland or the Netherlands. Unfortunately, the likely consequences of the tax are far out of step with its browbeaten rhetoric.

An especially concerning proposal, canvassed in a consultation document before the European Commission, is to tax companies based on their turnover instead of their profit, as is currently the case. This means that companies which fail to generate a profit or generate a low profit will pay the same tax as those generating large profits within the same country. The result is likely to be a downturn in capital investment and loss of jobs within these countries as large companies seek to limit local turnover or relocate their operations to more tax-friendly countries.

The tax has nonetheless attracted the support of major European leaders, including France’s Emmanuel Macron, one of its strongest proponents. “Internet giants are not contributing to funding the common good,” Macron said after a summit for European Union leaders in Tallinn, Estonia. “Some internet giants are not playing a fair game. They are using their dominant position to block other players, and we’re calling for an ambitious reform on that.”

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Macron should consider that his country has not been considered an attractive destination for capital investment or base for foreign companies because of its gratuitous 33 percent corporate tax rate, one of the highest in the developed world.

 

Ironically, the multinationals Macron has called out as the tax’s targets are also unlikely to be amongst its casualties as the tax has dire implications for small local businesses including tech start-ups. New or small companies often do not turn a profit in their first few years, rely on significant initial investment and are more vulnerable to market forces than larger or multinational players who are easily able to shift their operations or modify their business structure in response to new taxes. A turnover tax would render many of these businesses unviable, damaging innovation, domestic industry and destroying high quality jobs in the process. 

The EU tech tax isn’t without precedent. Let’s consider India’s experiment with a similar "equalization tax."

Since June last year, India has placed a 6 percent tax on digital "b2b" services proffered by foreign companies. These include cloud services and even advertising. The move has led to Google and Facebook imposing significant hikes on the prices they charge Indian consumers for ads and other services. It has also resulted in a 5 percent slowdown to growth in the digital advertising market of that country. In return, the tax has raised a paltry 1.5 billion rupees, or $22.8 million USD, in six months. It remains to be seen whether the same downturn will hit India’s e-commerce market, although prospects do not look great.

In 2016, the U.K. imposed the "diverted profits tax." Although colloquially known as the "Google tax" as it was expected to prevent Google from registering nearly $6 billion in annual British sales next door in tax-friendly Ireland, the tax failed to draw a single penny out of Google with UK Revenue & Customs concluding that the multinational’s offshore arrangement was entirely legitimate.

Ireland gained its nickname as "the Celtic tiger" by deliberately creating a business-friendly environment through timely tax reform in the '90s. The reforms fostered Irish recovery from the GFC, with several multinationals choosing to base their European operations in the Emerald isle.

European powers should follow the lead of Ireland and America, with the latter proposing changes to not only convert overseas-generated profits into domestic investment but to make American and foreign businesses more competitive through a drastic company tax cut.

These options offer a more viable, optimistic solution than an experimental, flawed tech tax which could drastically undermine jobs, growth and international cooperation in Europe. It is no wonder then that the tech tax lacks the support of 17 more EU finance ministers it needs to pass.

Satyajeet Marar is an associate at Americans for Tax Reform, a nonprofit group working to support limited government.