Tech giants face EU 'digital tax'

Under plans announced by the European Commission, major technology companies including Google, Amazon, and Facebook could soon face higher taxes.

Background

Big data and data analytics, robotics, process automation and enterprise information systems disrupt traditional business and operating models and create such opportunities as process improvement, supply chain re-alignment and full-scale enterprise-wide transformation. The world is at the juncture of digital, innovation and technology, which is a case where companies need a wider range of new support.

Corporate taxation has seen a massive change over the last five years, with more changes expected to come in the near future. Typically, digital tax works in four quadrants that comprise of offerings intended to deal with the changes due of an increasingly digital working world. This could range from interacting with digital tax administrations and e-governments to prepare for tax effectiveness in a digital economy to leveraging technology to unlock value, manage risk, improve efficiency, and provide relevant insights. It is increasingly important for companies to identify their immediate challenges from taxation to operations and develop an improved operating model strategy for the digital age.

To ensure successful long term sustenance of a firm in the digital world, flawless communication is an absolute necessity.

Analysis

The European Commission stated that companies with noteworthy online revenues are expected to pay a 3% tax on earnings for a range of online services, bringing in approximately €5bn (£4.4bn). The proposal would affect firms such as Facebook and Google with global annual revenues above €750m and taxable EU revenue above €50m. The announcement follows criticism that implies that digital technology giants pay too little tax in Europe.

EU Economics Affairs Commissioner Pierre Moscovici stated that the "current legal vacuum is creating a serious shortfall in the public revenue of our member states." He emphasized that it was not a move against the US or "GAFA" - the acronym for Google, Apple, Facebook, and Amazon.

According to the Commission, leading digital firms pay an average tax rate of just 9.5% in the EU - far less than the 23.3% paid by traditional companies. Its figures are argued by big players that have called the tax proposal "populist and flawed."

Many countries, including France and the UK, have blamed firms of steering profits through EU member states such as Ireland and Luxembourg, which are known to have low tax levels. US technology companies have disputed that they are in compliance with national and international tax laws. However, the Commission said it would impose taxes on companies depending on where the digital users are based.

The European Commission’s announcement of imposing digital tax is being seen as the most significant change in business taxation for decades. The proposal includes the taxing of revenues of digital firms, country by country, depending on the numbers of users and advertising income received. It wants all member states, including the UK which has made similar proposals, to apply the new Digital Services Tax which would raise up to £6.5bn across the EU, especially given that Britain has one of the highest levels of digital business use in the EU.

This is an essential change to the present tax rules which focus on the profits of companies that are closely aligned to where the company is headquartered and where its products are invented and built. For companies such as Facebook and Google that is the US, which is where they pay the vast bulk of their taxes. This poses a problem considering that the effective tax rates of digital businesses headquartered outside the EU is 9.5%. However, the effective tax rate of traditional businesses operating in the EU is 23.2%. The EU claims that this practice is severely unfair.

The proposals require backing from the European Parliament and the 28 EU member countries. In order for EU tax reforms to become law, the commission requires the backing of all member states.

Assessment

Our assessment is that it is a common notion that Google or Amazon or any business that has access to personal customer information could well be mishandling that data. However, the proposed tax would apply only to certain online revenue streams, such as online advertising in search engines or social media, online trading, or the sale of user data. We believe that this reform has been introduced primarily due to growing scrutiny surrounding questionable business practices of big tech firms in Europe. We expect that EU agencies are also set to tighten rules on data privacy, while Germany has introduced big fines for social media firms who fail to take down extreme content quickly enough.