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