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The EU’s Misguided Tax on Tech Giants Is Doomed to Fail

March 27, 2018 in Economics

By Ryan Bourne

Ryan Bourne

Amid the moral panic about “tech giants”, trust the
European Union to lead the way with a ham-fisted proposal to
“level the playing field”.

Politicians on the continent have worried for years about the
tax planning of these (usually American) super-firms.

Last week, they issued a proposal to deal with the perceived
problem: allow individual countries to tax the local revenues of
these giants at a three per cent rate.

The aim? To compensate for the fact that, according to the EU,
digital firms pay an effective corporate tax rate of 9.5 per cent,
compared to the 23.3 per cent faced by “bricks and
mortar” firms.

Developing a whole new tax base (revenues rather than profit)
for a relatively small number of companies seems a dramatic —
and arbitrary — course of action. And it throws up all sorts
of problems, some of which require further carve-outs and
convolutions of the tax system.

For starters, new, upcoming digital companies going global for
the first time would now have to navigate and structure their
businesses according to two completely different types of tax base,
beyond the ordinary compliance costs of operating across
countries.

This would be particularly harmful to small companies. Little
surprise then that the EU has introduced a threshold: companies
would have to have revenues of $750m worldwide and $50m in the EU
to fall under the regime.

But that’s just the half of the potential distortions. A
revenue tax creates a liability irrespective of whether the
business is making a profit or loss, heightening the possibility of
business failures.

In fact, it would be particularly destructive to digital
businesses with very high turnover but low margins, which is often
the case when firms are expanding and trying to build big
networks.

These are the questions
international tax lawyers are grappling with, and there’s no simple
or crude answer.

As the Institute of Economic Affairs’ Julian Jessop has
outlined, “a company facing an additional three per cent tax
on revenues but making margins of, say, six per cent would
effectively be paying corporation tax at a rate of more than 50 per
cent” — presuming they do not change their behaviour to
compensate.

The effects on innovation could be more broadly damaging.

Entrepreneurial new products or services bring with them
substantial uncertainty over whether they will be profitable or
loss-making ventures. Adding in a new tax cost associated with
revenue generated by a new idea could deter investment in new
services across the board.

One might consider all these effects a price worth paying were
this new tax regime genuinely “levelling the playing
field” for different types of business. That, after all, is
the stated aim.

But …read more

Source: OP-EDS

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