15/10/18

Brussels tees up new battle on tech, tax and Trump

(The Times) -- President Trump has little patience for Europe Union’s campaign to rein in Silicon Valley. This year he attacked Margrethe Vestager, the bloc’s competition commissioner, over Apple’s €13 billion bill for back taxes, telling Jean-Claude Juncker, her boss, at a G7 meeting in Canada: “Your tax lady, she really hates the US.”

The European Commission can expect the war of words over technology taxes to heat up. Several European countries, including Britain, are considering imposing levies on internet sales in an attempt to claw back some of the vast profits generated within their borders but which have escaped their grasp.

The mooted raid, however, is likely to enrage Washington at a time of simmering tension between the United States and Europe over trade tariffs. Mr Trump’s protectionist administration would view any attempt to force more cash from its tech champions as an act of aggression and surely would retaliate.

The EU’s tax raid is a response to growing frustrations over the peppercorn sums that European exchequers receive from American technology companies. Last week Facebook was lambasted for paying £7.4 million in corporation tax in Britain, the equivalent of only 19p for every one of its 39 million UK users.

Like many of its peers, the social networking giant has become adept at exploiting the gaps in the international tax code, using arcane accounting ruses such as the “Double Irish” to route licensing fees through low-tax jurisdictions and to shelter intellectual property in offshore havens.

The accounting ploys are legitimate under the present rulebook, which traces its roots back to the 1920s, when the League of Nations established the framework for taxing international trade. Most developed nations want to rewrite the rules, but they cannot agree on how to reshape a system created at a time when the global economy was dominated by physical goods.

Back then, a company typically would pay corporation tax only in countries where it had established a physical presence. Gaming the system was difficult when washing machines and television sets were the pinnacle of innovation. That’s not the case today, when so much of the value of gadgets and digital services derives from patents and other intellectual property.

For six years, the Organisation for Economic Co-operation and Development has been working on reforming the system and it has has made some progress on closing off myriad loopholes. Britain has implemented a diverted profit tax, hitting companies that use artificial structures to siphon profits out of Britain. However, a comprehensive solution to the conundrum of taxing “big tech” is several years away.

Last year’s US tax reforms have turned the world of international taxes upside down.

The Republican Party slashed the headline corporation tax rate from 35 per cent to 21 per cent and offered multinationals incentives to repatriate more than $3 billion of accumulated earnings that they had built up offshore. Crucially, it imposed a new tax on intangible assets, such as software patents, held in low-tax jurisdictions. Taken together, the changes remove incentives to stash overseas earnings in tax havens.

It was a bold move to copper-fasten America’s right to tax the global earnings of the US technology sector. Yet it also enraged many European countries, which believe that they are entitled to take a bigger slice of the profits that American companies derive from their citizens.

“The discussion of taxation of digital activities has moved from seeking to tax funds held offshore in tax havens to which country has the taxing rights over the profits generated by the digital champions,” Chris Sanger, head of global tax policy at EY, said.

Under the Brussels plan, large technology companies would be subject to a 3 per cent levy on their European revenues. The new tax would hit three specific activities: digital advertising, subscriber fees for digital services and the sale of personal data. The commission intends to target companies with global revenues with global revenues of more than €750 million.

The proposals have been championed by France, but are opposed by member states including Ireland, Luxembourg and Finland. There is little prospect of the commission winning the backing of all countries, which it would need to impose the digital sales tax across the bloc. However, several are willing to go it alone, including Hungary, Italy and Spain.

Philip Hammond’s position has been ambivalent. He told the Conservatives’ conference this month that he could unilaterally implement a digital tax if there was no international agreement soon. “The time for talking is coming to an end and the stalling has to stop,” he said. Yet he softened his stance at the International Monetary Fund’s recent meetings in Bali, saying that the Treasury was “not looking at the moment at an online sales tax on the sale of goods over the internet”.

Britain’s position is complicated, of course, by Brexit. Leaving the EU will give the chancellor the freedom to clobber the digital giants as hard as he wishes. But that, surely, would infuriate Mr Trump and possibly torpedo a transatlantic trade deal.