Three cheers for the European Commission’s tax on tech
The European Commission often gets a bad press. Sometimes it is ahead of the game — grasping nettles that national governments have avoided. This week the commission unveiled plans for a new tax on the EU operations of global technology companies. European governments and citizens should give it three cheers.
The moment has come to rein in the digital behemoths. Whether it is aggressive tax avoidance, regulatory arbitrage or abuse of personal data, the likes of Facebook, Google and Apple cannot indefinitely be permitted to shirk any responsibilities to the societies in which they operate. A digital tax is a welcome step in the right direction.
Supporters of the open international trading system and liberal democratic government should be among those applauding the effort to make these businesses pay their share. Globalisation can be sustained only if business plays by common sense rules. The trivial EU tax bills of some of the world’s most profitable companies are a powerful weapon in the hands of anti-globalisation populists across Europe.
The commission’s proposal is for a straightforward levy on sales to capture some of the hidden profits the companies generate in EU states. The present system of international corporate taxation — levied on declared profits rather than sales — has allowed tech companies to slip the net of a system designed for the pre-digital world.
The levy would fall on advertising revenues, user and subscriber fees and income from the sale of personal data by the largest digital players. At a rate of 3 per cent it would initially raise about €5bn a year from companies with a global annual turnover of more than €750m and EU taxable revenues of at least €50m. The commission expects the tax to be a bridge to a fundamental overhaul of international taxation to allow governments to capture the effects of digital technology.
Predictably enough, Silicon Valley has already raised armies of lobbyists to oppose the measure. Steven Mnuchin, the US Treasury secretary, has been enlisted to speak out publicly against the tax. One diversionary tactic is to entangle the tax with other transatlantic disputes, including that over US steel and aluminium tariffs. The levy, however, is not directed specifically at US companies. By the commission’s calculation it would affect about 100 from around the world.
The numbers speak for themselves. The commission estimates the effective EU tax rate of companies in other sectors of the economy at about 23 per cent. For the digital sector the rate is about 9.5 per cent.
The political signal sent by the new levy is as important as the additional revenues. After a long period in which the technology companies were allowed more or less to make up their own rules of operation, the commission has put itself at the forefront in measures to enforce greater competition and tax transparency. Google has been fined for breaching competition rules and Apple ordered to pay billions in back taxes.
This begins to answer the populists’ most potent charge — that even as rootless multinationals rob citizens of their economic security, the profits flow to a small global elite. Without the revenue, governments cannot put in place the education, labour market and welfare measures necessary to cushion the economic dislocation. Machine learning and artificial intelligence make the challenge still more acute.
As in their careless handling of personal data and visceral dislike of competition, so in their attitude to tax — too many of the digital titans assume they should sit outside traditional frameworks.
The commission has taken an important step towards disabusing them of this. Now it deserves the wholehearted backing of EU governments.