Europe’s Tech Tax Is a Mistake in the Making

(Bloomberg Opinion) -- One way or another, Europe is determined to get tech companies to pay their fair share. All that remains is to decide the meaning of “tech company,” “pay,” “fair” and “share.”

After months of talks, France and Germany have proposed a plan to tax big digital companies 3 percent of their Europe-based advertising revenue. This is a scaled-back version of a broader European Commission effort, and its very specificity is telling: In effect, it taxes only two companies — U.S. bêtes noires Google and Facebook — suggesting that fairness wasn't the designers' overriding concern.

Harmonizing corporate tax policy is surely a worthy goal, one that governments and companies should share. It reduces distortions, inefficiencies and incentives to cheat, while making compliance simpler and more predictable. It's true, moreover, that tech companies have often found clever ways to minimize what they owe (although this shouldn't be exaggerated).

The stated intention of this plan, then, is fair enough. But look closer and the rationale falls apart.

A first problem is definitional. As originally conceived, the tax would've applied not just to advertising revenue but also to enterprises such as data sellers and online platforms. For Europe, this was a problem: Such a tax might have affected its own automakers, banks or retailers, all of which now collect data and do business online to a growing degree. Taxing tech, it turns out, increasingly means taxing everyone.

And that suggests a broader incoherence. Granted, Facebook and Google have headquartered themselves (quite legally) in a low-tax jurisdiction (Ireland in both cases). Yet insurers, drugmakers, medical-device manufacturers and other conglomerates around the world strive to do the same. If the EU's goal is to discourage tax avoidance, it shouldn't be penalizing such a narrow category of the companies that engage in it.

One suspects that, just possibly, the real aim is different. Europe has never missed a chance to clobber the Silicon Valley behemoths. The proposed new tax, in fact, is of a piece with endless efforts to impose barriers on U.S. competition while capitalizing on a growing, if vague and misdirected, public backlash against tech companies. This is protectionism by another name — and like other kinds of protectionism, it will almost certainly backfire.

By making advertising more expensive, it will hinder Europe's small businesses. By encouraging companies to charge for products they once offered free, it could hurt consumers. By shielding local businesses, it will erode competitiveness. And there's the possibility of retaliation. No one can say how Donald Trump's administration will react to this squeeze on two American titans, but don't count on enlightened self-restraint as the likely response.

Things could even get worse. If this plan is voted down — it needs unanimous EU approval — several countries have vowed to forge ahead with tech taxes of their own. That would retain the defects of the EU plan (unfairness, incoherence, unintended consequences) while fragmenting the single market, inducing needless complexity, and collecting little revenue. Meanwhile, it would do nothing to fix the original problem: Companies will still be drawn to places where they will pay the least tax.

The right approach is to work toward a truly international system. Some progress is being made — painfully, ponderously — in talks at the Organization for Economic Cooperation and Development. The hope is to design such a system for the digital economy by 2020. EU governments have promised to forgo their own taxes if a suitable agreement materializes, and that would be to everyone's benefit.

Collaboration of that kind is a slog, and doesn't stir the emotions so well as unilaterally imposing a “Google tax.” On the other hand, it would maximize revenue while minimizing harm — and that's supposed to be the point.

Editorials are written by the Bloomberg View editorial board.

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