Google and Apple See the Ghost of Future Taxes

(Bloomberg Opinion) -- Google, Amazon, Facebook and Apple – or “GAFA,” as they're known in France – are easy to group together in the European imagination. They're big, they're American and they've tended to pay relatively little tax, thanks to legal loopholes and a business model that exists largely in the virtual world.

Frustrated governments have tried to use the courts and the hammer of EU regulators to squeeze more money out of the tech giants, but it hasn't always worked. So, rather than wait for international rules to catch up, France and a few others are embracing the tech sector equivalent of a financial transactions tax (a generic name for levies on transactions such as sales and purchases). It's a messy idea, but politically it makes the right noises.

Nothing about France's so-called “GAFA tax” will please those who favor simple and lucrative approaches to raising revenue for governments. Inspired by an EU proposal that failed to get unanimous backing from the bloc's 28 member states, Finance Minister Bruno Le Maire's proposal aims to hit companies making more than 750 million euros ($850 million) in global online revenues with what amounts to a 3 percent tax on their gross digital sales in France.

It's hard to see how this will help much, if you judge things purely on their economic usefulness. It will hit firms equally regardless of their profitability, its cost may end up being passed on to consumers, and there's a basic difficulty in tracking and policing digital revenues in an individual country.

The French idea seems to be that tech companies will submit their own figures, with the threat of penalties if they get the numbers wrong. Tax authorities will probably have to find new ways of gathering information to put a value on activity like digital commissions, ad sales and data collection. Even with a planned retroactive application date of Jan. 1, 2019, which is itself a controversial move, France estimates the tax will raise a measly 500 million euros – broadly the same amount brought in by the country's financial transactions tax in 2017. It's a digital drop in the ocean of France's approximately 80 billion euro deficit.

The tax has two big things going for it, though. The first is that public opinion supports it, which matters at a time when President Emmanuel Macron is clawing back popularity points from the Gilets Jaunes protest movement. And the second is that the lack of unity in the EU on this issue – with France, Italy, Spain, the U.K., Austria and Belgium pushing ahead with unilateral plans – might add to pressure on the holdouts. European voters are fed up of corporate tax loopholes, and want tech firms to pay. An EU assessment found a 14 percentage point gap in the tax rate between predominantly digital businesses and bricks-and-mortar ones.

The response from Google-owning Alphabet Inc., Apple Inc., Facebook Inc. and Amazon.com Inc., will be telling. There's a chance they will take the hostile approach and attack these taxes in court. Lawyers might argue that the levies are discriminatory against a specific sector and maybe even tantamount to a tariff on tech companies based abroad. This approach has worked in the past: Google won a legal challenge against a 1.1 billion-euro tax bill in France in 2017, after judges ruled its headquarters in Ireland took precedence.

But the smarter option from the American giants might be to quietly lobby in favor of a harmonized EU approach that would at least offer their investors some stability within the region. Tax changes are coming whether they like it or not, with the OECD and G20 looking at new global frameworks for digital levies. Tech firms can't keep fighting them forever.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.

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