Why does taxation of big tech companies seem so problematic?

Question

According to this Fortune article, The European Commission is making steps towards "normalizing" taxation for tech companies:

The European Commission wants to see big tech firms pay a 3% tax on some of their revenues. This is a major break from the traditional way of calculating tax based on profits.

The European Union’s executive body is frustrated with the relatively low corporate taxes paid by firms such as Facebook and Amazon, and individual EU countries are frustrated at seeing overseas firms take business from local rivals while booking their revenues elsewhere.

In the long term, the Commission wants to see the EU’s corporate tax rules reformed so that companies are taxed on their profits based on the location of their customers and users, rather than the location of their headquarters

One example of very low taxation is represented by Amazon which managed to pay about 0.1% in taxes (£15m / £19.5bn).

On the other hand, trade lobbyists see this initiative as discriminatory:

“The proposed turnover tax aimed at online platforms is discriminatory and ignores the global consensus that the so-called ‘digital economy’ should not be singled out,”

From my POV, revenue taxation instead of profit based taxation seems to the only significant issue, since it might not take into account small profit margins (e.g. Retailers may have profit margins as small as 0.5%).

Question: Why does taxation of big tech companies seem so problematic? Why does having a similar (to companies having a physical presence) level of taxation for them seem so difficult to achieve?

Answer 1

Question: Why taxation of big tech companies seems so problematic? Why having a similar (to companies having a physical presence) level of taxation for them seems so difficult to achieve?

Because tech companies can be located anywhere.

Amazon in particular can use multiple corporations to hide its income. For example, warehouses in Europe might be one corporation. Those warehouses might charge a different Amazon corporation a fee to hold their products in the warehouse. That fee may be just enough to cover the warehouses' costs, so there is no profit and therefore no tax. The paying corporation may be located somewhere that has a low corporate tax and a high value-added tax. But since the products weren't sold in that country, they don't pay the VAT.

Or flip things around. The tech company is selling a service, like advertising or web hosting. It buys computers from another subsidiary at a premium price. At the end of the day, the service-selling subsidiary just breaks even. The profit is booked in a Caribbean company that accepts a small fee instead of charging a tax on the profits.

From my POV, revenue taxation instead of profit based taxation seems to the only significant issue, since it might not take into account small profit margins (e.g. Retailers may have profit margins as small as 0.5%).

But this is prejudicial against companies that are not vertically integrated. Because if company A can't deduct the amount that it pays to company B and both companies pay a revenue tax, company B's revenue gets taxed twice, once when earned by A and once when earned by B. Meanwhile, if company A buys B, it can get rid of the tax on revenue earned by B.

It's also prejudicial towards companies that import (over those that source domestically). Because the companies that sell the imported products don't have to pay the revenue tax, as they aren't located where the tax is being charged. Locally sourced products do have to pay the revenue tax. Unless of course they are exempted. But the tech companies are good at taking advantage of exemptions like that.

Another issue is that tech companies like Amazon already pay a percentage of revenue in the VAT. This is nominally paid by the consumer while the new tax would nominally be paid by the seller, but that doesn't really matter. Consumers evaluate products by their final price while companies evaluate products by how much they get net of taxes. So the price is almost certainly the same regardless of who is considered to pay the tax.

The net effect is that a revenue tax is more likely to increase the price paid to the consumer than it is to reduce the profits of the corporation. Since consumers are often voters, this is undesirable. This is also true of corporate income taxes, but as they are nominally on profits, the connection is less clear.

Answer 2

There are a number of issues with taxing tech companies and the digital economy in general. I'll go into those later but first I think a look at the math might help explain why although turnover might seem high compared to tax paid actually in the example scenario given in the guardian article corporation tax is not much less than what a physical company might pay

Figures in millions of euros based on the article's 2016 figures

revenue = 21600m (EU sales only)

pre-tax profit = 59.6m

tax (presumably corporation tax) = 16.5m

average tax rate on profits = (16.5/59.6)*100 = 27.68%

Luxembourg corporation tax = 29.22% (5.7 on intellectual property income)

average margin = (21600/59.6)*100 = 0.275% very naive but gives an indication of how low margins may be also the Guardian article points out low margins

It is worth observing that despite the slightly below the full corporation tax that is paid in Luxembourg (according to these figures) there are countries where that tax bill may have been even lower for example the UK only has 19% corporation tax

General issues with tax on tech companies and the digital economy

• The country in which a company should pay tax is not always obvious for example for business through a website the customer could be in any country and the website could be hosted somewhere else and the business selling the product could be based somewhere else.
• Reduced impact of physical location makes it much easier for the company to be based in one country whilst doing most its business in another to increase its tax efficiency.
• Difficulty in assessing what is making the money and what is not. Google's algorithms for example lead to significant business for them but is the algorithm making the money, the infrastructure running it, the technical/sales organisation behind it all. This is significant again because of how these can be split across countries in other sectors a company will often do only one of these i.e. a manufacturer will build it sell it to a retailer who will sell it to a customer in a physical shop (maybe combined with an online shop) and if support is required this may be done my a further company.

Answer 3

While there are many reasons, a few of the core ones are that:

1. Most of the assets of tech companies are "hot assets" like cash and intellectual property and life insurance policies which are not closely tied to a physical location and easily moved.

2. "Hot assets" are particularly hard to tax in a territorial international tax regime which is the norm in most countries including the countries of the E.U. and applies to non-U.S. companies that do business in the U.S. but are not formed under U.S. law.

3. There is a "race to the bottom" in which some countries intentionally tax "hot assets" only minimally, if at all, in order to attract other kinds of business and revenue from firms that mostly have operations elsewhere (i.e. tax havens).

These conditions persist because the tax system of most developed countries was set up in an era when "hot assets" were a fairly marginal share of the economy and most assets could be easily associated with a physical location. But, as the tech industry expanded, some firms grew more "hot asset" heavy and an outdated tax system was ill suited to respond to them.