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If you are dealing with physical goods then establishing where a taxable profit was made is relatively straightforward. For tech companies which only distribute their services over the internet it's much more difficult to determine (from an accounting perspective) which parts of your costs belong to which revenue streams and where exactly a profit was made (geographically).

This is exactly what it is. This will allow EU to tax virtual goods.

Is it really relatively more straightforward with physical goods? With modern supply chains, components and raw materials are flying around the globe in a complex dance before they end up on your local store shelf or in an amazon warehouse. I believe there is decades of international tax case law which attempts to cover this with transfer pricing rules.

Often it seems tech/IT is simpler. A software engineering team in California write the code, then it's clear that nearly all of the value was created in California. It's fairly easy to price the cost of foreign datacenters for cloud hosting.

> Often it seems tech/IT is simpler. A software engineering team in California write the code, then it's clear that nearly all of the value was created in California. It's fairly easy to price the cost of foreign datacenters for cloud hosting.

I don't follow. Just because the software was written in California doesn't mean they don't have customers and derive profit from other regions. Likewise, sales tax on physical goods is applied at the point of sale, not manufacturing.

I should have made clear that I was discussing corporation tax where the principle is that where the value is created determines how the generated profit should be subjected to tax. This is the principle behind the current international tax system for corporations, I believe.

But actually my point was really to try to refute the intuitively attractive idea that intangibles are more difficult to tax than physical goods within this framework. Taxing consumer goods is extremely complex these days because of global supply chains and vertical integration. On the other hand in many cases, services like legal work, consulting, etc. are simple to tax under this system despite the fact that intangibles are being traded.

Not intangibles in general but websites in particular make it very difficult. I think there's just not detailed enough reporting available to associate revenue and costs. And if you would create much more extensive reporting frameworks you would likely put a huge burden on small companies.

Let's take the facebook news feed as an example. Loading just the page might cause requests from CDNs in three different countries. Then the frontend might have been written in the UK and the backend in the US. The ads manager for the ad you just clicked worked in Germany. I doubt any modern IT company can track expenses on that level of detail. And associating costs with revenues is non-trivial either: Did the front end contribute to the revenue generated with the ad click? Did the backend or just the work of the ads manager in Germany? There's so much leeway for companies right now.

IT companies like Google and Facebook have one single product (ads) that generates most of their revenues. The country where the revenue occurred can be easily established (eg. an ad sold to a German company). But the costs to create this product (the whole platform) have been accrued all over the world. Without intimate knowledge of the corporate structure and the technical setup companies can basically tell you any story about where these costs were incurred.

It’s not. The IKEA example is having the business in individual countries pay “royalties” to a company that in turn sets up whatever Dutch/Irish loophole is needed to not pay much taxes.

BUT - and this isn’t irrelevant - even though IKEA might not pay much taxes on corporate profits in (say) Sweden, Selling physical goods in physical stores still produces value. They manufacture in Sweden about as much as they sell in Sweden. So overall, it’s much easier to accept the near zero tax.

The corporations whose large profits and zero taxes annoy people are the online giants.

> The corporations whose large profits and zero taxes annoy people are the online giants.

well SAP is probably one of them, but I never heard that somebody is annoyed by their tax policy. I never heard anything said against them and I'm pretty sure that they follow the same scheme than Apple, Google, Facebook, etc.

(P.S. I'm german)

Where do you get that? SAP's 2017 financial statement says the company paid 970 million euros in income tax on a profit of about 5 billion €:

https://www.sap.com/integrated-reports/2017/en/primary-conso...

Yes, but (mostly, except for VAT) in Germany, not in the countries where they sold the software.

AFAIK, most of SAP's business goes through local resellers and consultants. They pay taxes in their countries.

The iPhone App Store is a completely different animal from SAP's consulting-heavy sales model, and it seems understandable that the EU commission is interested only in the former.

Then it was a wrong metaphor in the first place. You're right.

Funny fact, IKEA is a non-profit, and don't pay taxes on profit.

What about the salesman in Europe ? Or you consider that code is the only value in a company?

I’m on my phone now so excuse sloppiness in my reply.

Also I’m the very opposite of a tax lawyer but my understanding is that the salesman’s added value is determined by transfer pricing rules. It works as if he bought the good or service from the Californian developers at a certain price. The profit is then calculated in each country deducting local costs and taxed accordingly in each country.

The tricky bit is in agreeing the transfer price but there are decades of complex internationally agreed rules to determine a price if the transfer isn’t at “arms length” - for example between related subsidiaries.

The picture is muddied by the weird US tax rule that allows companies to defer paying their US split of the corporation tax by keeping the cash out of the US. But the tax is due - this is why the US authorities were aghast at the EU’s Apple ruling. It was viewed as a European raid on money that was theirs (the US government’s) to tax.

A software engineering team in California write the code, then it's clear that nearly all of the value was created in Californi

Code by itself is valueless. If the code is to show an ad then the value is created when and where is ad is viewed.

I think there's a second angle to this, which is that the assumption in your example is that the tech company is the one distributing the good within a particular country. There's an argument to be made that, unless the company has hardware housed in the nation, the transaction equally resembles someone crossing the border to purchase a good and then coming back across.

> always the revenues of American tech companies

Clearly not.

Vodafone: https://www.theguardian.com/uk-news/2014/jun/14/uk-uncut-vod...

Topshop: https://www.theguardian.com/business/gallery/2010/dec/04/uk-...

Barclays: https://www.theguardian.com/uk/2011/feb/19/barclays-ban-prot...

Just like Amazon's search for a new HQ, taxation based on borders is broken in a globalized world. Megacorporations can shop around to find a tax regime they like, playing countries off against each other to get a good deal. [0]

Reaching for solutions that either provide for extraterritoriality is only logical, given how impossible it is to unify the whole world behind a common tax scheme. It's a typical tragedy of the commons.

[0] https://www.reuters.com/article/us-google-tax/google-account...

It would be interesting to ponder where would companies choose to go if every nation harmonised their tax system globally. Removing all tax incentive.

We are heading to a harmonised tax system, zero corporation tax everywhere.

"Harmonised tax system" makes it sounds so nice and useful, let's rather call it what it actually is: A race to the bottom, without an actual bottom.

It's not just zero tax, in some cases they are literally handing out incentives, at the expense of the remaining taxpayers.

Or, slightly more achievably, imagine that the EU and a few other economically large countries agreed that any corporation with more than, say, a billion dollars in annual revenue has to pay at least X% effective tax rate somewhere (and report their accounts to each of the countries concerned), or be forbidden from operating within any of their borders.

Extra rules would need to be in place to stop large corporations splitting themselves into smaller smurf companies, but the X% number could initially be set to a value which doesn't cause any low-tax countries to lose any corporations which base themselves there.

> anything comparable between American tech companies selling stuff in Europe to European companies selling stuff all over the world

Many european companies are located in their countries of origin where they cannot dodge certain taxes on revenue, profit, employees salaries/pensions, environment, local taxes and so on.

OTOH the famous tech companies use extremely aggressive tax avoidance schemes (e.g. the Double Irish and so on).

You are not very data driven :).

Facebook in UK paid £5.1M in tax for £842.4M in revenues. Criteo in USA paid $83M sold for $332M. The effective tax rate of the GAFA is 8% versus 25% for traditional export companies such as Airbus.

Maybe :) but if you're going to provide numbers like that, then I'd be interested in hearing, for example, how much foreign corporation tax was paid by French aeronautical companies on their 50B worth of exports? Or German car companies on their 100B worth of exports? Or any UK companies on their exports?

Wasn't the 8% due to the deferment of foreign income tax? And with the US tax reform they will pay it for all those years of accumulated profit (and they are no longer able to defer it).

Eg. Alphabet had a 3B loss last quarter due to taxes.