US tech companies face a new tax on revenues

American tech companies make billions, yet pay pennies in tax. New levies in France and Britain seek to change that. But will they work as intended?

What's happened?

France and the UK have each moved a step closer to answering one of the key questions about a globalised and digital-dominated economy. Namely, why should the world's most valuable and profitable companies the likes of Google, Apple, Facebook and Amazon get away with paying derisory levels of tax in countries where they earn substantial revenues? Last week the French senate approved a new 3% digital services tax on the revenues (ie, crucially, not the profits) of large multinationals that provide digital services to consumers or users in France. The so-called "Gafa" tax (an acronym derived from the four US firms listed above) will apply to companies with revenues of more than €750m globally and €25m in France. The tax will apply to everything from providing a platform for selling goods and services online, to targeting advertising based on users' data.

And what about the UK?

The Treasury unveiled Britain's slightly more modest version of the tax last week a 2% levy on companies with global revenues of more than £500m and more than £25m in the UK. If approved by Parliament following a consultation period over the coming months, the tax will come into force next April, and the Treasury estimates it will raise £400m a year by 2022. However, as in France, the UK government made clear that its tax would be scrapped in the event of a wider global settlement on tax under the auspices of the OECD club of advanced economies or the G20.

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Why is such action necessary?

Because global tax laws have not yet caught up with an era in which giants of global commerce have relatively few tangible assets and far greater intangible ones, making it relatively easy for them to shift profits and reduce their liabilities by domiciling in low-tax jurisdictions. Put simply, it is unjust for companies to enjoy tax advantages simply because they are big and transnational. In addition, their ability to avoid fair levels of tax is fuelling a popular backlash against globalisation. A new tax regime could calm things down.

Why is taxing these firms so hard?

Because their businesses have become masters at stashing their intangible capital such as intellectual property in tax havens such as Luxembourg and Ireland, and booking only minuscule profits elsewhere. Such tactics are perfectly legal. But there was understandable uproar, for example, when it was discovered that Amazon's British subsidiary paid just £1.7m in UK corporation tax in 2017-2018, when its revenues in this country were $11.4bn. Under the proposed new levy on revenue, not profits, Amazon would have paid £228m in tax more than 100 times as much. Amazon is exceptional. But on average, according to the European Commission, digital services firms pay just 9.5% tax on their profits, compared with 23.2% for more traditional firms.

How has America responded?

By opening a formal investigation into whether the French move unfairly targets US businesses, and threatening retaliatory tariffs. There's a widespread feeling in the US that Europe, with few digital champions of its own, has adopted a particular vindictiveness when it comes to the world-beating champions of Silicon Valley. For example, the European Commission has levied billions in fines against Google over anticompetitive practices in recent years, says The Economist. The Irish government was ordered to claw back $15bn from Apple in 2016, after the Commission ruled it had offered the firm a "sweetheart deal". Facebook, too, which has just been fined $5bn by the US authorities a fine widely seen in the US as little more than a slap on the wrist could face yet more stringent punishment in Europe. "All this at a time when America and the EU are discussing a trade deal. Those talks have hit a wall. France has just added another brick."

What will happen?

It's possible that neither the British nor the French levies will ever raise a penny, says Robin Pagnamenta in The Daily Telegraph. If the Trump administration concludes that the tax unfairly targets US business, and does introduce crippling tariffs on imported French cars, cheese and wine, it's hard to see France choosing to get drawn into a trade war with the US, for all its current tough talk about "sovereign" decision-making. As for the UK, the tax has plenty of backing in Parliament, but British politics is consumed by Brexit. Assuming we do leave the EU soon, relations with the US will be dominated by the goal of concluding a sensible free-trade deal with Washington. In such circumstances, it's hard to see Boris Johnson, as prime minister, living or dying by a digital-services tax Donald Trump hates. Far more likely, in the face of "modest pressure to drop it" from the president, he'll end up "folding like a cheap suit".

What about a global agreement?

Since EU efforts to agree a bloc-wide digital tax fizzled out at the end of 2018, the UK has put its hopes in an agreement at the global level. Last month the G20 meeting in Japan agreed to "redouble our efforts for a consensus-based solution with a final report by 2020". But the big stumbling block is agreeing a fair division of tax revenues, and the resistance of the US home to most of the world's digital giants to rules that treat digital companies differently from others. One plausible scenario, says international tax lawyer Lilian Faulhaber in The New York Times, is that countries will see France's move as a "portent of the disorder that could arise if they do not reach an agreement at the international level" leading to greater international efforts to resolve the issue. That, ultimately, would be in America's interests, too. Unless a broad consensus is reached, other nations are likely to follow France and Britain, and US companies "will face a cascade of different taxes from dozens of nations that will prove onerous and costly".