Can Big Tech be taxed more? The true, the false and the uncertain

The digit­al eco­nomy has reshaped glob­al trade, allow­ing com­pan­ies such as Google, Apple, Face­book and Amazon, com­monly referred to as GAFAM, to estab­lish them­selves as key play­ers. How­ever, these mul­tina­tion­als con­tin­ue to bene­fit from tax regimes that are far more favour­able than those avail­able to tra­di­tion­al com­pan­ies in Europe. Accord­ing to the European Com­mis­sion, in a state­ment issued in Janu­ary 2019, digit­al com­pan­ies pay an aver­age effect­ive tax rate of only 9.5%, com­pared with around 23.2% for tra­di­tion­al busi­ness mod­els¹. This find­ing is rein­forced by a report from the European Tax­a­tion Obser­vat­ory, which states that des­pite the adop­tion of new inter­na­tion­al rules, large digit­al com­pan­ies con­tin­ue to enjoy effect­ive rates of less than 15% thanks to tax optim­isa­tion strategies².

This situ­ation high­lights the European Union’s cur­rent inab­il­ity to effect­ively reg­u­late an increas­ingly dema­ter­i­al­ised eco­nomy. Although the OECD, in a report on the digit­al­isa­tion of the glob­al eco­nomy, notes that tra­di­tion­al tax­a­tion based on ter­rit­ori­al­ity no longer meets the needs of a glob­al­ised digit­al eco­nomy³, tan­gible pro­gress remains lim­ited. The main prob­lem remains the estab­lish­ment of a fair and con­sist­ent tax frame­work to counter the aggress­ive tax avoid­ance mech­an­isms used by these giants.

With his expert­ise in inter­na­tion­al tax­a­tion, Mar­tin Col­let, pro­fess­or at the Uni­ver­sity of Par­is-Panthéon-Assas, provides an in-depth ana­lys­is of the chal­lenges of tax­ing GAFAM. His work reveals the incon­sist­en­cies of the glob­al tax sys­tem in the face of the rise of the digit­al eco­nomy, and he warns of the risks of tax dis­tor­tion res­ult­ing from nation­al approaches such as the GAFA tax. His art­icle “Tax­a­tion of the digit­al eco­nomy: glob­al chal­lenge, loc­al responses⁴?” illus­trates his call for con­cer­ted reform at the inter­na­tion­al level.

TRUE: “The European Union is unable to introduce harmonised digital taxation due to a lack of unanimity among its Member States.”

The intro­duc­tion of a uni­fied digit­al tax with­in the Coun­cil of the European Uni­on faces a major obstacle: the lack of unan­im­ity among Mem­ber States. As Mar­tin Col­let explains, “when it comes to tax­a­tion, the treat­ies are extremely clear: unan­im­ity is required for a meas­ure to be adop­ted. There are a few excep­tions for indir­ect tax­a­tion, such as VAT and cer­tain taxes on alco­hol, but unan­im­ity is required for oth­er tax meas­ures.” This prin­ciple allows a single coun­try to block the adop­tion of a reform. For example, in 2019, Ire­land, Sweden and Den­mark vetoed the pro­posed digit­al ser­vices tax⁵. Such diver­gence between states reflects con­flict­ing pri­or­it­ies: some seek to pre­serve their tax com­pet­it­ive­ness, while oth­ers want a more equit­able dis­tri­bu­tion of tax revenues.

Des­pite renewed efforts by the European Com­mis­sion in 2021, as part of its “Com­mu­nic­a­tion on Busi­ness Tax­a­tion for the 21st Cen­tury⁶,” no uni­fied plan has been agreed upon to date.

UNCERTAIN “The technical difficulties involved in defining and locating digital revenues are the main obstacle to fair European digital taxation.”

Tech­nic­al chal­lenges exist, but they are not the only ones hinder­ing the adop­tion of har­mon­ised digit­al tax­a­tion. The dema­ter­i­al­ised nature of digit­al ser­vices com­plic­ates the iden­ti­fic­a­tion of the tax base and loc­a­tion of profits. In this regard, Mar­tin Col­let states that it is neces­sary to: “Dis­tin­guish between dif­fer­ent types of tax­a­tion (on profits, turnover, etc.). The main prob­lem lies in the dif­fi­culty of tax­ing the profits of com­pan­ies whose main activ­ity is loc­ated in low-tax jur­is­dic­tions, such as Ire­land.” This struc­ture makes it pos­sible to arti­fi­cially min­im­ise the tax bur­den, to the det­ri­ment of coun­tries where the income is actu­ally generated.

Added to this is the fact that “large digit­al com­pan­ies have incor­por­ated tax con­sid­er­a­tions into their organ­isa­tion from the out­set. They loc­ate their intan­gible assets (pat­ents, algorithms) in low-tax jur­is­dic­tions, which sig­ni­fic­antly reduces their tax bur­den because sub­si­di­ar­ies estab­lished in these ter­rit­or­ies absorb most of the rev­en­ue.” This optim­isa­tion phe­nomen­on goes bey­ond mere tech­nic­al dif­fi­culties: it reveals a strategy that is deeply embed­ded in their busi­ness model.

The reform can­not there­fore be lim­ited to tech­nic­al adjust­ments; it requires a more ambi­tious over­haul. “The inter­na­tion­al tax prin­ciples in force date back to the 1920s. They require a phys­ic­al pres­ence to jus­ti­fy tax­a­tion by a state. These prin­ciples are now out­dated in the con­text of the digit­al economy.”

UNCERTAIN: “Heavily taxing digital giants would jeopardise Europe’s economic attractiveness vis-à-vis the United States and Asia.”

The idea that heav­ier tax­a­tion could dis­cour­age digit­al invest­ment is reg­u­larly raised. Mar­tin Col­let notes that: “Some coun­tries believe that increas­ing sec­tor­al taxes is not appro­pri­ate, as it hinders cer­tain eco­nom­ic activ­it­ies.” How­ever, oth­er factors such as reg­u­lat­ory sta­bil­ity and access to the European mar­ket also play an import­ant role in com­pan­ies’ decisions on where to loc­ate. Fur­ther­more, a country’s com­pet­it­ive­ness does not depend solely on its tax rates, but on a mul­ti­tude of eco­nom­ic and polit­ic­al factors.

The out­come of a high­er tax on attract­ive­ness remains dif­fi­cult to pre­dict. This phe­nomen­on is all the more com­plex because, as the lec­turer and research­er points out, “some com­pan­ies prefer to loc­ate their activ­it­ies in coun­tries with more flex­ible tax­a­tion, such as Ire­land, which allows them to sub­stan­tially reduce their tax bur­den.” It is there­fore neces­sary to take many para­met­ers into account when assess­ing the con­sequences of European tax reform.

FALSE: “Digital giants pay taxes in Europe that are proportional to their profits on the continent.”

Digit­al com­pan­ies still bene­fit from an effect­ive tax rate of less than 15%, accord­ing to the European Tax Obser­vat­ory⁸, mainly through optim­isa­tion mech­an­isms. By loc­at­ing their profits in low-tax coun­tries such as Ire­land, they avoid tax­a­tion pro­por­tion­al to their actu­al activ­ity, widen­ing tax dis­par­it­ies with­in the EU.

Regard­ing the French tax, Mar­tin Col­let explains: “In terms of budget­ary rev­en­ue, its impact is not insig­ni­fic­ant: in France, the tax brings in between €300m and €500m per year. How­ever, a large part of this cost is passed on and there­fore borne by French users, not by the com­pan­ies themselves.”

There is no har­mon­ised GAFA tax at European level

Nev­er­the­less, he also points out that “the polit­ic­al impact of these taxes is con­sid­er­able. They have helped to accel­er­ate inter­na­tion­al dis­cus­sions and have led to pro­gress such as the adop­tion in Europe of a dir­ect­ive impos­ing a min­im­um tax rate of 15% on profits made in tax havens. They have exer­ted sig­ni­fic­ant polit­ic­al pres­sure on the United States and helped to advance the inter­na­tion­al tax reform project.”

FALSE: “The European GAFA tax is already in place and is working effectively to tax large digital companies.”

There is no har­mon­ised GAFA tax at European level. Although some coun­tries, such as France, Italy and Spain, have intro­duced nation­al taxes on digit­al ser­vices⁹, these ini­ti­at­ives have not led to har­mon­isa­tion of the European mar­ket. While use­ful for loc­al applic­a­tion, these taxes cre­ate frag­ment­a­tion in tax regimes and do not allow digit­al giants to be taxed effect­ively at the European level.

Fur­ther­more, “these com­pan­ies have struc­tured their activ­it­ies to take advant­age of tax dif­fer­ences between coun­tries,” warns Mar­tin Col­let. “This makes their tax­a­tion much more com­plex and reduces the effect­ive­ness of any reform.” The lack of tax coordin­a­tion with­in the EU there­fore remains a major obstacle. In 2021, the European Com­mis­sion sus­pen­ded its digit­al tax pro­pos­al pending inter­na­tion­al nego­ti­ations on a glob­al min­im­um tax¹⁰.

FALSE: “Recent international tax reforms, notably the global minimum tax, will automatically solve the European digital taxation problem.”

The glob­al min­im­um tax pro­ject, nego­ti­ated by the OECD and the G20 (“Pil­lar 2”), aims to set a min­im­um tax rate of 15% for mul­tina­tion­als¹¹. How­ever, this reform does not spe­cific­ally tar­get digit­al com­pan­ies and provides for sev­er­al excep­tions, which lim­its its effect­ive­ness. Even if this ini­ti­at­ive reduces the attract­ive­ness of tax havens, it does not entirely pro­hib­it the tax optim­isa­tion strategies used by some digit­al companies.

It is in this sense that Mar­tin Col­let warns against excess­ive optim­ism. “Although this reform may have pos­it­ive effects, it will not entirely resolve tax inequal­it­ies with­in the EU. The main­ten­ance of attract­ive tax regimes in cer­tain coun­tries, such as Ire­land and the Neth­er­lands, con­tin­ues to under­mine the effect­ive­ness of the reform.”

Aicha Fall