Home Tax Planning Taxing Tech Companies Won't Save Legacy Industries

Taxing Tech Companies Won't Save Legacy Industries

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The debate around corporate taxation and the digital economy has been going on since at least 2010. In the aftermath of the financial crisis governments were frantically searching for fresh revenue to alleviate the impact of the crisis on their national budgets. And in the US, Democrats still had a majority in both houses of Congress.

The logos for Facebook Inc., Amazon.com Inc., Netflix Inc. and Google, a unit of Alphabet Inc. Photographer: Jason Alden/Bloomberg

That was when an article by Bloomberg’s Jesse Drucker made quite a stir. It explained in great detail how Google avoided paying corporate taxes by relying on the infamous “double Irish and a Dutch sandwich”. Other articles followed, highlighting the rather similar tax situations of Apple, Amazon, Microsoft, and Facebook, as well as not-so-techy companies like GE and Starbucks.

But the stir around such tax planning wasn’t followed by much action. That’s because making those companies pay more taxes demands a radical overhaul of the international tax system.

First, the accepted international authority on taxing corporate profits, the OECD, would have to establish a consensus around new principles, including a new definition of a permanent establishment. Then the organization’s members would have to translate those principles into the OECD’s model tax convention. Then all countries willing to embrace the new approach would have to renegotiate their bilateral tax treaties (or adhere to the brand new multinational convention dedicated to avoiding double taxation on corporate profits, which is a first). Overall, it would take years, even decades, before corporate taxation would come into line with how value is created in today’s economy.

This is not a particularly attractive proposition for politicians who are interested in short-term victories rather than long-term technicalities. So despite the in-depth work undertaken in specialized circles (most notably at the OECD and the G20 and more recently within the European Union), there hasn’t been much progress. Plus, with a Republican-dominated Congress dealing with a Trump-led White House, there is little indication that the US will lead the way toward a new international consensus.

Above all, though, there is a wide gap between public outrage and the ability to effectively change things over the short term. And that gap is skillfully exploited by lobbyists working for certain industries that see tech companies as an existential threat. Their refrain goes like this: “You governments will never reform corporate taxation. Therefore we should balance things out by creating a special tax on ‘THRIVING TECH COMPANY A’ to compensate for the loss of revenue in ‘DYING INDUSTRY B’.”

And so local tax creativity has been flourishing. There was the Spanish tax on Google to finance newspapers (which apparently was a disaster); the French tax on Uber to finance the purchase of medallions from impoverished taxi drivers (which was eventually not implemented); and most recently the British tax on Amazon to finance traditional retailers (put forward by Chancellor Philip Hammond).

With regards to this last example, an optimist may have thought that the UK breaking free from the European Union would inspire a forward-looking view of how to manage the economy. Alas, the opposite is occurring, with UK Labour leader Jeremy Corbyn the latest to join in with his idea for a special tax on online news aggregators such as Facebook to finance investigative journalists (and another on Netflix to finance the BBC). As stated by Chris Yiu on Twitter“How long before we’re talking about taxing Spotify to pay for Glastonbury tickets, or iPhones to pay for NHS installs of Windows 95?”.

Elected officials should resist the corporatist pressure that leads to this kind of narrow taxation. All these special taxes, if implemented, will be at best ineffective, as they do nothing to address the underlying problems with taxes and governmental revenues. And at worst, they will even strengthen the very companies they look to reign in while making it more difficult for startups and entrepreneurs to succeed.

The cold reality is that we need a new progressive tax push that fits today’s techno-economic paradigm rather than one that tries to turn back the clock and artificially prolong the lifespan of legacy industries struggling to survive.

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