Nova workboard

a blog from young economists at Nova SBE

Pay me what you owe me: Europe taxing the digital economy

According to recent public debate, European governments have been missing on quite a chunk of tax revenue. Numerous firms have been getting away with paying virtually no taxes in European countries where they have billions in revenues. They took advantage of the different corporate tax rates across Europe, registering their profits in the countries with the lowest effective rates, despite operating in other countries as well.

The scandal came to the forefront in November 2014 when thousands of documents were leaked by a former employee of PwC. They exposed how over 300 firms worked closely with accounting firms and tax authorities so as to secure the legality of the scheme. Ever since, the EU has launched a number of investigations into companies’ tax dealings, targeting foremost tech giants, which featured many times throughout those documents.

Matters escalated since 2016. The European Commission accused Apple of getting illegal state aid, after a 3-year investigation into the company’s tax affairs. A deal between Apple and Ireland granted the former a tax rate of 0,005% in 2014, while the country’s usual rate of corporate tax is 12,5%. As a result, Apple was fined €13bn in back-taxes, that is, taxes that were not paid when due in past years (https://www.theguardian.com/business/2016/aug/30/apple-pay-back-taxes-eu-ruling-ireland-state-aid). A study conducted by the Centre for Economics and Business Research found that UK bookshops pay eleven times more corporate taxes than Amazon. In 2016, Amazon increased its volume of business in the UK to nearly £1.5bn, while it paid less 8.4m in corporate taxes – a flat contradiction (https://www.theguardian.com/books/2017/sep/12/amazon-pays-11-times-less-corporation-tax-than-traditional-booksellers).

The tipping point came, in my opinion, in July 2017. A French court rejected an effort by the French government to fine Google in €1.115bn in back-taxes. Paris claimed Google had its paperwork go through Ireland to disguise its revenue from France ad sales. Although the court didn’t agree, it’s a fact that Google’s effective tax rate is far from Ireland’s legal rate of 12,5%, as we can see from the following graph (https://www.bloomberg.com/view/articles/2017-07-13/france-shouldn-t-let-google-get-off-tax-free):

graph 1

This slap in the face was crucial for France to realise the solution to the issue at hand: it shouldn’t focus on demanding back-taxes, but on creating new legislation on tax avoidance. Hence, the new initiative by French President Emmanuel Macron: taxing tech giants based not on profits (Europe’s current method) but on revenues generated in each country.

Tech groups shouldn’t take all the blame though. For years, governments all over Europe pushed for cuts on corporate taxes to attract US tech giants to Europe. Curiously, one EU official who is currently backing the French plan is none other than Jean-Claude Juncker, the President of the European Commission, who formerly pushed for those tax cuts while serving as Luxembourg’s prime minister. Tables do turn.

On a final note, it all comes down to whether tech giants are just maximising shareholder returns or unethically avoiding taxes. I’d bet on the latter.

 

Pedro Afonso | Masters in Economics @ Nova SBE

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Author: studentnovasbe

Master student in Nova Sbe

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