Taxing on revenue rather than profit feels wrong. If you run a loss you're still on the hook for taxes? That doesn't make sense to me.
How far can the EU push before these companies decide it is not worth having actual businesses there?
How far can the EU push before these companies decide it is not worth having actual businesses there?
Given that it's one of the single biggest and lucrative markets on the planet, much farther I would guess.
People are way too screamish about the threat of companies running away. Service providers aren't going to abandon hundreds of millions of high income users.
But tech companies don't have profits here because of their tax optimizations. So, I guess it's not difficult where they got their sauce from.
Edit: (downvotes not agreeing with the term "most")
> robinson7d mentioned 38% as second language, 13 % as first language. So => 51% (or, "most")
Source: https://en.wikipedia.org/wiki/English_language_in_Europe#Oth...
Just pointing out that's not true. The number is around 38% who have a working knowledge, second place is tied with German and French at 14% [1].
1. https://en.wikipedia.org/wiki/English_language_in_Europe#Oth...
English as a first language accounts for 13%, which when added to the 38% leaves you with 51% (or, "most")
http://ec.europa.eu/commfrontoffice/publicopinion/archives/e... (Cited at https://en.wikipedia.org/wiki/Languages_of_the_European_Unio...)
Those numbers also don't have a correct representation of English speaking business owners and English speakers ( first language). Since your numbers mention "English as foreign language".
Same wiki :
The language is also a required subject in most European countries.[3] Thus, the percentage of English speakers is expected to rise.
The number of English speakers has been steadily increasing for quite a while already, at least in Germany. Mere 10 years ago speaking English was a skill which wasn't that common and thus quite a bit valued, nowadays most modern (and especially IT-centric) companies expect you to know English, it's nothing really special anymore, at this point it's rather expected.
The language is also a required subject in most European countries.[3] Thus, the percentage of English speakers is expected to rise.
Added a quote from robinson7d:
> That citation is for "English as a foreign language", and if you read the end of the paragraph you see they are excluding UK and Ireland. English as a first language accounts for 13%, which when added to the 38% leaves you with 51% (or, "most")
https://en.wikipedia.org/wiki/Languages_of_the_European_Unio...
Perhaps not as good, but good enough.
The weaker the profit potential in the EU, the less companies will invest there. The effect of higher taxes can't be reduced to "leave or stay." Moreover, the diminished incentive to invest would also to apply to potential replacements for these companies. So, very hypothetically, if Google spends $100 in Europe and they leave when they decide investing less $50 isn't worth it, the next company taking their place will likely only want to invest $50 rather than the $100 you were already getting from Google. It's still a loss unless you want to assume both that Google's replacement would be European and protectionism is a wise economic strategy.
any laws on the book that prevent listing all taxes embedded in a sale?
True, in that it would better to fix the underlying problems that allow companies to pretend they have no profit. In practice though, it’s not likely to be a problem.
How far can the EU push before these companies decide it is not worth having actual businesses there?
Very, very far. They’re not being pushed much at the moment.
Profit is a complex calculation when talking about cross-borders. If you company spends $20B in country A, $0 in country B, has revenue of $10B in country A and $10B in country B, how much profit did it generate in country B?
Just because information services have a near-zero marginal cost, it doesn't mean they have zero cost.
I totally agree, but equally we know that the company makes profit in both countries, regardless of how the figure is juggled. That leaves regulators with the puzzle of figuring out how to fairly tax them; a levy on revenue isn't an awful idea if it's correctly applied, but there might be better solutions.
It is a terrible idea, because it tends to favor companies that have their cost base in the country. In other words, local companies.
This is a trade war move.
Which is just the opposite of the current situation where the non-EU/offshore company has an advantage. My UK based company pays taxes in the UK on its profits, but a US company could come in and undercut us with the mechanisms already discussed.
Why shouldn’t the EU have the unfairness stacked against the non-EU organisations? It seems that’s what they should be doing.
If there’s a way to make the situation into a level playing field then that’s even better.
But you can’t play the ‘trade war’ argument when it’s already being abused to the detriment of EU companies and tax payers.
That's why this is a trade war between countries with different tax rates. And they don't even need to have different tax rates. This also isn't any different from sending production to cheaper countries.
Not only that, but this is a basic condition for global trade and globalization.
Countries will compete, and that's good for the world.
> But you can’t play the ‘trade war’ argument when it’s already being abused to the detriment of EU companies and tax payers.
I'll translate that as "less efficient countries refuse to reform and increase efficiency to compete in global markets, so decides to close borders to global markets".
That has had a positive outcome in exactly zero percent of the times it was tried.
Sounds like opinion rather than fact. It’ll just be a race to the bottom of countries cutting corporation tax, etc. Which means less revenue for the governments and therefore less societal services for the residents of those countries.
Society is predicated on the notion that if we all chip in a percentage of our gains from work performed then the really difficult stuff (that corporations won’t and individuals can’t achieve) can be done by a central authority - it minimises risk and provides stability. If external corporations syphon off 100% of that value then society suffers.
Why should countries compete? What’s the point? What benefits does it bring to their residents? Countries are not corporations trying to vie for a place in some Global Index, they’re places with people in who want a certain level of service for the work that they do.
Local tax rates are what they are because the people living in those regions think it’s an acceptable level. What rights does an external corporation have to just ignore their wishes?
You don’t have to be a socialist to understand this concept. We all need governments for the tough stuff.
The current system can’t continue because it’s anti-competitive and anti-society. Those corporations need to pay their fair share toward the societies that they’re profitting from.
I don’t blame them for gaming the rules: the rules must change to stop this from happening.
> You don’t have to be a socialist to understand this concept. We all need governments for the tough stuff.
I'll answer. The benefit is that it allows for freedom of choice for residents. If some people like certain qualities of a given country, they can move there. If they like other qualities of a different country, they can move there instead.
Different people want different things in their society, and thats OK. We do not need a one size first all world government that forces the minority to accept the opinions of the majority.
We do indeed need government for many things, but different people disagree about those things, and how much the government should be involved and thats ok! Everyone can better get what they want if they are given the choice to move around between countries.
There are, of course, barriers to entry as not everyone can move to a new country at the drop of a hat, but it is still not as difficult as it might seem. I've lived in a dozen different states in the US, for example (yes, states are not equal to counties, but they really are quite different, and have many different laws).
With freedom of movement in the EU, at least, it is particularly easy for residents to move around.
I'm not completely sure why that would be the case – wouldn't it result in a relatively level playing field?
This is the core problem, but it's also very difficult to solve.
Google makes money in Europe by selling advertising to European customers. It moves money out tax-free by claiming that much of its income is used to pay for the worldwide tech infrastructure and brand usage to its parent company.
But this is not entirely fictional. To run its business in EU, the local branches do need the infrastructure and Google brand, and paying for it is a valid business expense. The problem is calculating a realistic price for it. How much does Google UK benefit from the "dinosaur game" in Chrome, or how much should the Google Germany share of its development cost be?
Coming up with a fair and loophole-free formula seems impossible. It might be easier to just put a lower tax on revenue than a higher tax on profit.
I agree that it’s rediculous that the double dutch (irish) sandwhich is still legal, so they should work on closing that hole.
As a datapoint: "Apple's 2017 accounts showed they made $44.7bn outside the US and paid just $1.65bn in taxes to foreign governments, a rate of around 3.7%. That is less than a sixth of the average rate of corporation tax in the world." [0]
Profit is a complex calculation when talking about cross-borders. If your company spends $20B in country A, $0 in country B, has revenue of $10B in country A and $10B in country B, how much profit did it generate in country B?
But we don't live in a sane world. All these multi-country tax schemes effectively mean that corporate profits can't be trusted to be reported accurately. It's easier to just stick the tax on revenue and then corporations may finally have an incentive to lobby to live in a sane world again.
Another option I can think of is for countries in the EU to set guidelines and impose harsh provision (a doubling of the tax rate, say) if a court finds that the guidelines have been breached.
It isn't right if Wall St is overjoyed at EU earnings, but the EU hasn't collected a dime of profit.
That's perfectly right, unless you're suggesting that every country should have only local companies and should block every foreign company from operating there.
Not only it is right, it is very, very good for society. In the past 60 years, poverty went from 60% to 9% dues to that.
But if you want to ignore that and charge non-existing profits in your imaginary country, go ahead, you're dooming your imaginary country to failure for not understanding basic economics.
Countries don't need parasitic businesses like that. All they will do is undermine the economy and local competition.
There's no such things as parasitic businesses, "right of revenue" or anything like that.
You're not even wrong.
A company is fully within their right to choose how it spends money but the taxation should work on an individual nation basis. Why should investment in country A come at the expense of tax revenue generated in country B?
And this isn't any special for tech. Tech companies are not asking for special treatment, they are currently treated like any other company in accounting terms. Governments are trying to treat them in a special way.
If you have a company that makes a chair in France for $20, ships it to Spain (let's day for free) and sells it in Spain for $0, how much profit did this company generate in each country?
This is exactly the same accounting as the tech companies, but their services have a very high fixed cost and a null variable cost, while the chair maker is the opposite.
Your "parasite" analogy doesn't make any sense. Trade relationships add value to both sides, but if you wish your people to have a worst product for a higher price, go ahead and ban competition.
As an example look at the similarities of clothes and shoes donations from the west to Africa with opening up to parasitic businesses. All these charity efforts have done is undermine the local clothes and shoes production and market making it impossible for people to build businesses and create jobs.
If I open up a new fictitious nation to all trade and allow them all tax write off on investment in other countries then I don't get a prosperous nation. I get a basket case that cant compete with foreign existing industry, can't develop competitive local industry or employment, and likely stuck in debt because tax revenue would be so low.
It isn't "zero" at all. That's not how economics work.
http://steve-yegge.blogspot.com/2009/04/have-you-ever-legali... (search for legalization)
Perhaps they will just use revenue for allocating profits, and then tax based on profits like they currently do? For example, if a company has $1 billion profits based on $2 billion revenue in France and $3 billion revenue in Germany, they could tax based on a similar profits split. The company would owe tax in Germany on $600 million profits and in France on $400 million profits.
It does not make sense.
For example I too would like to pay taxes only for what's left from my salary after paying my rent, my food, my clothes, all the books I read, entertainment I consume, etc..
Basically only for my 'profits' after I reinvest everything back so I would only pay taxes for my savings account [1] (which will probably be 0 as that money would be invested somehow).
It does not make sense!
[1] https://itep.org/amazon-inc-paid-zero-in-federal-taxes-in-20...
This is for companies that make money in the EU but don't pay taxes here. If Apple decides to pay taxes here like we all do then they will get taxed on profits. Revenues is just far simpler to calculate if you know/assume 'tax optimization'.
The issue is that some of the bigger players avoid making a profit on the operation in the EU. The national budgets expect a certain level of corporate profit and tax on sales to make the numbers.
When you have many massive players avoiding that tax - plus smaller players unable to get the same tax structures/advice to even compete - it starts to become an issue.
For a long time the megacorps have argued they create a lot of jobs - but they've likely crested on that now as they push to eliminate jobs - and there is a lot of evidence that government is supporting many of the low paid jobs these companies do 'create' (£11BN in UK in 2014 according to this report - https://www.theguardian.com/sustainable-business/2015/apr/20...)
Plus I don't get this reasoning to start with. Isn't it inherently more efficient to provide services as a large corporation? Thus, lots of smaller companies would probably employ quite a bunch more people to achieve the same.
Small inefficient local businesses that provide some local families an income and pay a bit of corp tax - start to become more important to a country than global megacorps providing a few government subsidised minimum wage jobs whilst offshoring all the gains from capturing massive market share.
Currently companies manage to pay close to 0% (see Apple) tax rate. Progressive tax won't be enforceable with any creative accounting. Progressive tax works only as income tax (pretty much) as it is virtually impossible to hide and the 'creative accounting' at lower amounts is not cost effective.
Currently min VAT is 17% which is higher than corporate tax in quite a few member states.
Are you really going to threaten those countries with taking your non-tax paying elsewhere?
Edit: Amazon paid just £15m in tax on European revenues of £19.5bn https://www.theguardian.com/technology/2017/aug/10/amazon-uk...
And since ~2016 or earlier? amazon pays taxes in every country they operate. In germany they even changed the invoice address to be german ~2016-2017. a long time they used luxemburg as their invoice address which was really clever, until it broke out a scandal. http://europa.eu/rapid/press-release_IP-17-3701_en.htm It contains a good picture, which explained it. And now all sales are recorded in the operating countries. and amazon now needs to provide certain tax related information on a per country basis.
Owing absolutely nothing in taxes despite billions in revenue also feels wrong.
This seems to be pretty clear retribution for what many believe is rampant abuse of tax law.
Because of how VAT works we have a lot of companies in the EU that lives by essentially reselling stuff. These chains can be long.
If you apply revenue taxing to low profit margin businesses with high turn-over and long supply chains we'll see some negative results.
It's a decent way to hit tech giants, because a substantial part of the revenue is profit. But the unintended victims might be numerous on this one.
Where are you? When I write off business losses that are paid through my personal income taxes I can end up owing no income tax in the U.S.
Why would they leave? Just raise prices in the EU to compensate.
Taxing companies on profits is just punishing efficiency. The tax has other disadvantages like being very easy to dodge by big corporations and difficult to dodge by small/honest guys. It's the worst possible tax and I hope it dies soon. Taxing on revenue is at least something new that seems more fair.
If you tax revenue instead of profit, you push low-margin industries (the ones that are operating the most efficiently/ competitively) out of your country. It is a very silly thing to do.
It is unusual that the tax plan in the article targets the specific high-margin tech companies. I wonder how the implementation will accomplish this.
Additionally, your competitors either were more efficient than you, and enjoyed higher profit margins, so they deserve to beat you in the market, or they just have to increase prices just like you do. Hardly an example of driving business out of the country, unless you are into protectionism, but then tariffs are a tool of choice.
They will raise prices, what's the problem? Importer will still pay the tax on revenue so there won't be at any advantage for being located elsewhere. Taxing on profit on the other hand... licensing fees, expensive company cars, "consulting" fees. There is now way to police what is and what isn't a justified expense. We need a way to tax in more fair way to encourage efficiency. Taxing on revenue is one such idea.
Labor costs are not equal everywhere, and other regulations also might make it an advantage to be located elsewhere, for example environmental regulations might make your process more expensive.
If you want to prevent manufacturing in countries with less environmental regulation and cheap labor then you need tariffs. Trump is a fan of it but it's not exactly a popular idea among the tech crowd.
I don't see how this has any impact. Either the companies that exist will find a way to make the market work, or they will leave and a new company will.
But what if by SHEER COINCIDENCE the profit you would have made by normal accounting standards just so happens to be EXACTLY the licensing fee an overseas subsidiary charges to use your own brand?
Google spent a billion quid on their new HQ building in London. That's an awful lot to invest in a country where you make no profits...
IMO your comment would read better and be more persuasive if you'd simply downcase the allcaps.
Not really, if it's a regional talent center; Google needs physical locations where it wants to spend money by hiring people more than it needs them where it makes money, since it's moneymaking operations are not high-tech in-person interactions.
It wants workers educated by the State, who travel on infrastructure maintained by the State, who have healthcare provided by the State, security provided by the State, yadda yadda yadda. All the advantages, but none of the costs.
Now, all that said, I don't think subsidiaries should be able to use licensing agreements and other loopholes to move revenue to eliminate profit and reduce corporate tax. To me the solution is just to disallow any movement money related to intangibles (payments or license fees) unless the exchange is a bona fide transaction between unrelated parties. These subsidiaries in different jurisdictions are all entities owned by the same holding co's. It's like selling your brother a house for $1 (or more like the use of your last name for $1 Billion).
If you have employees in a country, then you necessarily will pay income tax in that country.
These are normal accounting standards.
If we decide that the double duct/Irish sandwich/etc are loopholes that are being explored and we'd like them closed, then it's entirely valid to do so.
Money made in the past does not mean that your are entitled or guaranteed to make money in the future.
I am completely in favor of designing new tax laws that close such loopholes. But taxing revenue in this way is a very, very dumb idea.
It's surely also most impossible prosecute, but speculation wrt. taxes is generally not legal.
That accounting should show a nice profit in EU countries.
External accounting is what you show your investors and tax authorities. It has to conform to all relevant laws, and you play your usual tax avoidance games. Both of those make it fairly unusable for decision making.
Internal accounting is what you base your decisions on, and you can do whatever you like (since you aren't showing it around). It just has to provide insight. For example you can have departments do virtual payments to each other for production steps and services to help you quantify how well departments are doing.
In English/US accounting traditionally you would only do fiscal accounting, but doing internal accounting as well is getting popular.
The issue is that accounting is very complicated. Like really, really complicated. And that's because you're trying to make a lot of very different companies follow the same rules on how to recognize revenue, costs, investments, etc.
For example, here's a real world problem I came across once: how do you recognize the revenue of selling virtual tractors on FarmVille?
- When the sale takes place?
- Over a pre-set period of time, determined by the average lifetime of an user?
- Over a pre-set schedule that follows depreciation schedules of real tractors?
Economic is even more complicated. Economic profit takes in account the cost of opportunity, so a company might have accounting profit but no economic profit. It gets even worse when you're talking about cross-border accounting.
In other words, companies usually have managerial accounting using their own internal rules, and standards-based accounting (GAAP, IFRS, etc.), to report operations to the government and to the owners.