EU considers new tax for tech giants - will Brexit Britain follow suit?

Profile picture for user ddpreez By Derek du Preez March 4, 2018
The likes of Amazon, Google and Facebook have come under increasing public and political pressure over their dwindling tax bills in Europe.

EU tax money
The European Union is set to unveil a new tax for the world’s largest tech giants, which will likely be in the 2% to 6% range. The move comes at a time of growing public and political discontent at the way that tech giants (legally) use low tax EU states as havens to route their revenues through, in order to reduce their tax bills.

The likes of Amazon, Google and Facebook have been heavily criticised for paying what appears to be very small proportions of tax compared to their growing revenues in the EU region. They have all, in response to the public criticism, made some form of public commitment to pay more tax - whether that be through agreements with individual countries to pay some back-dated tax, or by making promises to route more money via the countries that they earn the money in.

It’s a complex tight rope walk, given that politicians want the technology giants to keep growing their businesses in-region, not wanting to scare them off with huge tax bills, but also needing them to compete fairly with home-grown businesses.

In recent days, French Finance Minister Bruno Le Maire told Le Journal du Dimanche, that a “a European directive will be disclosed in the coming weeks” and that it will be a “considerable step”.

Le Maire added:

The (tax rate) range is 2 percent to 6 percent, we will be closer to 2 percent than 6 percent.

It’s a starting point. I prefer a text that will be implemented very quickly rather than endless negotiations. We will fine tune it later.

A draft European Commission document seen by Reuters last month, which is still subject to changes, proposed a levy based on where the customer - rather than the company - is located.

Le Maire added that “Amazon is welcome in France because my top priority is job creation and Amazon represents thousands of jobs”.

Last year, Amazon paid just €16.5m (£15m) in tax on European revenues of €21.6bn (£19.5bn), reported through Luxembourg in 2016. It’s UK Services arm, which includes the company’s warehouse and logistics operation, more than halved its UK tax bill from £15.8 million to £7.4 million year-on-year.

Amazon cited increasing costs for the fall in owed tax, despite its turnover over the same period increasing from £946 million to £1.46 billion.

In recent years US-based technology companies – including the likes of Google and Facebook – have come under increasing pressure from citizens and governments to stop routing their revenues through low-tax EU member states, in order to avoid paying higher tax bills in each territory.

For example, experts estimate that for the 10 year period to 2016 Google has probably paid around £200 million in tax on estimated profits in the UK of £7.2 billion. That’s a tax rate of around 2.7%, when most businesses based in the UK pay a corporate tax rate of 20%.

Previous UK Chancellor of the Exchequer, George Osborne, struck a deal with Google to pay £130 million in back-dated taxes for the past ten years.

Equally, Apple was recently hit with a €13bn tax bill by the European Commission, after it ruled that the company had been receiving illegal state aid from Ireland, where its EU operations are based.

What about the UK?

As the UK plods along with its position and negotiations with Brexit, one question worth asking here is - will it follow the EU’s position on global tax affairs? It’s an interesting question, given that the Prime Minister has said that it will continue to align itself with certain EU regulations and diverge in others (although where exactly these alignments will take place, is still unclear).

There are some that believe that if the UK wants to remain competitive place for global companies to base their business, it may offer a more competitive tax regime than the EU in future. The British government has already considerably cut corporation tax in recent years.

It’s not unimaginable that if the EU ups its taxes for technology giants, the UK then may decide to undercut it. But will this fly with the EU if the UK wants to continue with frictionless access to its markets? I would argue that the EU wouldn’t be too keen to give the UK unrivalled access via a new free trade agreement, whilst it then undermined the EU with a low tax haven, similar to what Ireland currently offers.

However, it’s too soon to tell, as the UK continues to fumble its Brexit position.