Big Tech's next European nightmare: A tax on revenues

Big tech companies are bracing for new taxes in Europe that could cost them billions.Policymakers acr...

Posted: Oct 31, 2018 5:24 PM
Updated: Oct 31, 2018 5:24 PM

Big tech companies are bracing for new taxes in Europe that could cost them billions.

Policymakers across Europe are developing rules that would force tech companies to pay taxes on revenue generated in the region, rather than on profits. Tech companies are lobbying hard against the changes.

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"It is a pretty big departure from the general understanding of how you apply tax on multinationals," said Daniel Bunn, director of global projects at US think tank The Tax Foundation.

The tax initiative is the latest in a series of European regulatory and legal efforts to target tech companies. The European Union has imposed tough new data privacy rules, and hit tech companies such as Google (GOOGL) with major antitrust fines.

The changes to the tax system are being championed by French President Emmanuel Macron, who has thrown his weight behind a European Commission plan for a 3% tax on sales of select online services. It could take effect as early as 2020.

The levy would apply to companies with annual global revenue of at least €750 million ($851 million) and online sales of €50 million ($56.8 million) in the European Union. Google, Amazon (AMZN), Facebook (FB) and Apple (APPL) would be top targets.

Calls to tax big tech have been fueled by the relatively small amounts paid in Europe by tech companies, some of which route profits to low-tax countries in the region. Tech companies fear the rules could set a precedent that would be followed by governments elsewhere.

"The digital economy is new, and the existing tax laws on the books really aren't prepared for it," said Channing Flynn, an international tax partner at EY. "This is a way to begin reforming the tax law."

A global effort

The Organisation for Economic Cooperation and Development is pushing to agree global standards among the richest economies of the world, but a final proposal is not expected until at least 2020, and even more time will be required for any changes to be implemented.

Europe doesn't want to wait that long. The Commission has billed its 3% tax as a temporary solution, with the ultimate goal being the ability to tax tech companies on profit generated in specific countries in Europe.

The United Kingdom, which is scheduled to leave the European Union in March 2019, is moving even more quickly. It broke ranks with its peers on Monday, announcing a 2% levy on sales of digital services in the United Kingdom. The new tax will take effect from April 2020.

The British government estimates that its plan will generate £400 million ($510 million) a year in revenue, while the European Union expects its tax will raise €5 billion ($6.4 billion).

Tech fights back

Tech companies are fighting back hard.

Digital Europe, which represents the industry in the region, said the Commission's proposal would undermine existing tax treaties and effectively tax them twice on the same sales.

"To safeguard the principles of fairness and integrity in tax policy, any tax on the activities of corporations should be linked to profit, not revenues," the group said in a letter to European ministers earlier this month. Its members include Apple, Amazon, Google, IBM (IBM) and Microsoft (MSFT).

Some see the tax changes as part of an effort to boost local companies at the expense of Silicon Valley giants.

Leaders of the US Senate Committee on Finance said in a letter to the Commission earlier this month that the rules "discriminate against US companies" and create "a significant new trans-Atlantic trade barrier."

"There is a political edge to it. The big companies have been dominant and this is a political effort to allow some UK or European companies to compete," said EY's Flynn.

The top Republican on the Ways and Means Committee, the lead taxwriting body in Congress, called the proposals "troubling."

"Singling out a key global industry dominated by American companies for taxation that is inconsistent with international norms is a blatant revenue grab," Rep. Kevin Brady said in a statement on Wednesday.

"If the United Kingdom or other countries proceed, that will prompt a review of our US tax and regulatory approach to determine what actions are appropriate to ensure a level playing field in global markets," he added.

Some European tech companies have also spoken out against the proposals.

"Taxing revenues, as opposed to profits, will also impose a significant compliance cost, requiring new processes and infrastructure to be established," a coalition of European tech firms that includes Spotify (SPOT), Booking.com (BKNG) and Rovio told European finance ministers in a letter.

Katie O'Donovan, Google's UK public policy manager, told British lawmakers on Tuesday that her company would prefer one set of global rules.

"A multilateral, international solution is one that will be really meaningful," she said. "We look forward to continue and supporting an international resolution."

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