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