Personally, I like this proposal. I like that it's simple: any overly complex system will almost inevitably result in distortion and loopholes. A few points of my favorite points:
* It's done on revenues and not profits. This avoids the impossible question of where profits are realized: if you make money in one country but displace that earning by costs somewhere else, it's practically impossible to determine where the tax should go.
* It's uniform across the EU and so it doesn't incentivize companies to base themselves in any member over another. This avoids the distortion we have now with Ireland's permissive tax system siphoning up all the company headquarters and with it the (scanty) tax revenue.
* Each member receives money based on the number of users they have in their own country, meaning they have a strong incentive to increase usage of digital services and a disincentive to put in place regulatory measures that would decrease adoption and harm growth.
One of the problems of the current situation is that it sets tech companies up as these parasitic monsters that creep into a country, make huge profits, alter the society as they see fit, and give nothing in return. The best thing about this proposal is that it sets up a harmonious relationship: governments get to make money while companies get to have their access to citizens legitimized. With that legitimacy comes better PR and a seat at the table as legal systems everywhere catch up to the world tech companies have created.
Plus it might finally put that ridiculous "tech companies are tax evaders" meme to rest.
I have yet to talk to someone that can explain to me why a VAT wouldn't be better. We already know how VATs work, they're already fair, they already handle low-margin companies very well. Why bother with a revenue tax? It heavily stilts the game in favour of bigger players because it encourages vertical integration.
I agree that our largest tech companies are already too powerful and need to have a higher tax burden to compensate for the warping effect they have on the world, but that's more easily done via international tax harmonization / internationally agreed upon minimums to effective corporate income / wealth tax rates. A straight up revenue tax is bananas.
Correct me if I'm wrong, but VAT is only applied to goods sold to consumers, not to companies. If I'm a VAT registered company (like Facebook) and I buy a VAT-able item like a computer (from MSFT), I don't pay VAT.
So similarly, if I'm a computer manufacturer (MSFT) and want to buy VAT-able advertising (from Facebook) then I don't actually pay VAT.
So in what way would this lead to tech giants that primarily sell B2B being taxed?
And how would that work? Let’s say I’m a company that can choose to buy advertising from Facebook for 99 plus 25% VAT or from someone else for 100 plus 20% VAT. If I can deduct the VAT paid I get a better deal going with Facebook.
I'm arguing that all companies should have the same VAT rate. If for some reason we want to apply a higher rate to a company it should be via lower base deduction.
The whole discussion is about targetting some particular companies. That explains why a VAT, which is paid by the consumer anyway, wouldn't be better. If you’re going to distort the VAT chain to be get something equivalent to a tax on the sales of specific companies, how is it going to be better?
Because by doing a standard deduction you're keeping certain mathematical properties that VATs provide, like the ability to sell a good multiple times without paying layered taxes. Standard deductions stop this warping while still providing the warping that is desired.
And saying a VAT is paid by the consumer is silly. All taxes are paid by the consumer ultimately. What matters is capturing the taxation in a locality where the infrastructure used is roughly paid for by entities utilizing it. If CocaCola sells $10B of Coke in the EU, a VAT captures that and it should. If a financial services firm sends someone out to consult the Saudi Government the transaction is (and should be) outside the EU. When the income is repatriated is when corporate taxes kick in to cover the infrastructure that is engaged with production.
Too high of a VAT and firms shift manufacturing jurisdiction since VATs naturally discourage exports. Too high of a corporate tax and firms keep corporate income offshore and lobby for reduced taxation rates.
> If CocaCola sells $10B of Coke in the EU, a VAT captures that and it should.
If I understand correctly, you propose to eliminate corporate taxes and go from the current system (taxes on consumption and taxes on corporate profits) to a pure consumption-tax system.
In that case, when CocaCola sells $10B or LossMakingSoda sells $10B (or ExtremelyProfitableCo sells $10B) the taxman gets the same amount (directly from the consumer, and not just conceptually). It’s natural that governments want to extract more money from those companies that have more money.
> The best thing about this proposal is that it sets up a harmonious relationship
It does the exact opposite. It spurs a further acrimonious relationship between the major economies of the EU and the US. Particularly France and Germany, which are a combined outsized share of the EU economy and represent ~80% of the trade deficit that the US has with the EU.
This new tariff exists solely because the EU can't compete on technology and needs to raise barriers. It's the same reason any country chooses to implement lopsided tariffs, as a shield from competition.
It encourages the US to figure out how to retaliate for a new tariff that was designed to almost exclusively target US tech companies. The US will have no choice but to respond with something equally punitive on EU imports. That'll just make relations between the EU and US worse.
What you are describing are Trump's steel tariffs, which indeed make no sense and do exactly what you say.
I believe what the EU has realised, is, that trying to tax the profits of corporations that will simply move them around and declare them wherever they don't have to pay taxes on them, is a game of cat and mouse the EU can't win. So, they decided to go a different route.
When Google decided they could negotiate the tax they had to pay in the UK with George Osborne, the public outcry was massive (think: "Why can't I get an appointment with HMRC to negotiate what I owe in taxes?").
The EU needs to show that the social contract is non-negotiable, lest it face further disenfranchisement of the populace.
This is a good first step in the right direction, in my opinion. Whether it's tech companies, or any other big industrial conglomerate, tax avoidance is not acceptable.
> What you are describing are Trump's steel tariffs, which indeed make no sense and do exactly what you say.
That's exactly what I'm describing. The US can't compete with low cost producers on steel, so it is seeking to raise barriers to competition.
Although I will point out there's at least one target for steel tariffs that would be very beneficial: Russia. The US imports four times as much steel from Russia as it does from China, and nearly as much as it does from Mexico. I'd much rather see those imports go to Canada and Mexico. The US can freely shut down all trade with Russia to zero negative economic effect for the US. Russia imports a mere $7 billion worth of US goods, ie it's a meaningless export market for the US (while the US buys $17 billion worth of Russian goods, ~1.4% of their economy).
Europe largely can't compete on technology with the US, failing for the last 10, 30, 50 years to build competitive companies and products of the scale that the US has. While the US has 40 or 50 large technology companies, the EU has a comparable four or five. So up the barriers go. I don't see how a 3% revenue tax is going to change the balance much though, they'll have to get a lot more draconian.
This policy by the EU is an admission of dysfunction and failure of the EU system. They can't get their countries to implement what some consider proper tax policies individually, so they're going to attempt (and likely fail) to get a unanimous vote on this revenue tax.
There are 20 countries in Europe with statutory corporate tax rates either just a bit above Google, near it, or below it. The effective rates are that much lower. Most of Europe is turning into a very low corporate tax haven. Except for a few nations, such as France, which has an infamously high corporate income tax rate. I can't imagine what the complaint is exactly given all of those low tax rates, other than that the spoils are overwhelmingly going to eg Ireland and other EU members with larger populations are jealous. I see this primarily as an attempt at wealth redistribution by Germany and France in their favor vs small lower tax EU nations.
Ireland has a GDP per capita nearly twice that of France now, in part due to their low tax policies. It's obviously in France's interest to try to pry some of that away from them.
Apologies, I may not have been clear enough in my formulation there. I meant the social contract, as in: You pay taxes and get something in return. For some people it may also be something like 'you work hard and therefore get to live a reasonably comfortable life'. The social contract, for me, is simply about making sure everyone plays by the same rules.
Socialism is a completely different topic. I wouldn't even know how to define it, considering how many wildly different definitions of it there are. I think the regulated markets, like Germany and Scandinavian countries have a nice model, but even the crazy American model would be fine, if the rules were the same for everyone.
Again, I was not talking about socialism or how to fund it.
By the way, you mentioned that this consumption tax is not how you fund socialism. How do you fund socialism? I'd be very interested to hear your perspective :)
Face it: some form of taxation was going to appear no matter what. It's inevitable. You don't just roll into a country, make billions of dollars, and expect to pay no tax in perpetuity. As tax proposals go, this one is pretty reasonable.
This isn't a punitive measure because it sets no one apart for any past behavior. It also isn't a "shield from competition" because all companies have to adhere to it, not just American ones.
The companies and their employees pay taxes, though. On electricity, on data, on personal income, on gasoline, on property, etc. Whether an entity is paying its fair share is a legitimate question, but it's strange to me to blame companies for following the law as written.
> Face it: some form of taxation was going to appear no matter what. It's inevitable.
And a retaliation from the US, via a similar trade tariff that exclusively targets EU companies, is also likely inevitable.
Lets the trade wars being. I wonder who will come out ahead.
> It also isn't a "shield from competition"
Imagine if the US added a 20 dollar champagne tax. By definition, "real" champagne can literally only come from the Provence of champagne, France. But technically the law applies to US companies, perhaps ones that own a vineyard in France.
Would you be OK with this theoretical tax? It is totally fair, and not targeted against anyone specific country!
Hopefully we will get more "fair" taxes like these in the upcoming trade wars.
> Face it: some form of taxation was going to appear no matter what. It's inevitable. You don't just roll into a country, make billions of dollars, and expect to pay no tax in perpetuity.
This is basically how exports work, why should tech be different?
Actually, this is what “free trade” is exactly. No import tariffs between most EU/US trade.
Similarly to what OP said, since this tax disproportionately affects US companies doing business in EU, the US is likely to add a torrid to EU exports to the US. And the argument “You don’t just roll into a country, export billions of dollars of cars (or whatever), and expect...”
Despite the fact that these companies are putting headquarters in Ireland, it's actually US taxes that they're seeking to minimize, so it's not really the EU's place to collect them here. With the new UA corporate tax law changes for international income I expect fewer US companies to build HQ in Ireland. Though being domiciled in Ireland also makes the Ireland Data protection Authority their primary point of contact too.
If we accept the Ireland situation as a legal fiction, then the EU would see no revenue here anyway, so I don't see the EU as actually being cheated out of anything. EU firms domiciling in Ireland could reasonably be interpreted as hurting other EU members, but that's not really the case here.
This largely looks like an EU tariff on whatever they end up defining digital companies as, which will likely be defined in such a way to tax Google and Facebook, while avoiding taxing Spotify.
> You don't just roll into a country, make billions of dollars, and expect to pay no tax in perpetuity.
The reason this policy is being pushed, is because some nations have benefitted a lot from US tech companies, eg Ireland, while others eg France and Germany, are jealous that they're not getting their spoils (while simultaneously seeing no large domestic tech company creation). France and Germany have vast influence over the EU, they regard it as their little fiefdom of power. To watch Ireland become richer and richer and richer by the year, as their GDP per capita just keeps soaring ever higher, drives those sleepy giants crazy.
GDP per capita
Ireland: $68,000
Germany: $44,000
France: $39,000
It's pretty obvious what's going on.
Ireland's economy has tripled in size in 17 years.
France's economy hasn't net expanded since 2006.
Germany's economy hasn't net expanded since 2007.
I seriously doubt France and Germany - both high corporate income tax nations - want to see a bunch of Irelands further sprout up in the EU, pulling even more economic benefit away from the power duo in the EU.
1) It's a race to the bottom. If Germany or France lower their taxes, Ireland will go even lower.
2) It works for Ireland to have low taxes, because they are a small country collecting the tax for the entire profits in the EU. Even if their tax rate is low, they still get a sizable benefit. This can't work for the big countries.
1) Why would Germany and France care? They have not been collecting taxes anyway, race to the bottom until Ireland can't anymore.
2) It works for Ireland because other countries prefer not to engage. If Germany had the same tax rate it wouldn't work for Ireland anymore right? As what is now Ireland only revenue would be split between the two or more countries.
When this happen wouldn't Ireland have to raise taxes if it wanted to keep the same money?
It appears to me that this would achieve an stable and healthier equilibrium after some time.
Ireland can't win a race to the bottom, and it will have to have higher taxes if others will lower theirs.
So all other countries have to do is lower taxes to force Ireland to raise its own, and reach a new higher taxes equilibrium, that is beneficial to all countries.
Ireland's low tax works for Ireland because it has no competition, so it gets the "market" all to itself. If competition arrived, Ireland would have no option but to raise taxes to make it up for it - as it needs this funds. It would essentially force Ireland's hand on this issue.
On the OPEC side they have external and internal competition. Sometimes they can make it work because demand is higher than what external competition has to offer and what internal competition need, but if external competition has enough supply or internal competition need more than they are getting, it does not work anymore (and the price drops because of extra supply).
Admittedly, my reply was lacking necessary detail. The parallel I was trying to draw with OPEC is that, in order for a cartel to work effectively, each member has to adhere to the rules established by the cartel, sometimes to the short-term detriment of any individual cartel member. With OPEC, this means strict controls on the output of oil. In good times, each member seems to keep production in line with the OPEC established standards, but the minute any stress is added to the system (primarily dropping oil prices), all bets are off and we see individual members increasing their production to maintain short-term cash flow - you essentially said this same thing in your comment.
It seems like your proposal would establish a cartel-like structure related to corporate tax rates. I was trying to point out the inherent fragility of this type of arraignment, especially in the EU where there are many stressors between member countries.
I think the system will work only as far as you have power players that are able to punish everyone who gets out of line - by racing to the bottom and driving profits out as a punishment [1].
That's exactly what I think complaining countries should do. They're not getting any revenue now, so they are able to power play Ireland into fair taxation, and the system will be as stable as their possibility to do so. If you take into account that any country cheating will take revenue away from others (thus their reason for a high tax), they should always be able to counter, as they are now.
If I spend £100 on AdWords as a company, the £20 VAT comes off my VAT bill. I pay £20 less.
So Google's VAT bill is utterly inconsequential and meaningless.
VAT is only paid once by consumers for products, advertising is a company expense that simply shifts the VAT one level down the chain. It doesn't get applied at every level on the supply chain, it gets passed down.
So if Amy's Amazing Tours sells a £100000 tour round London, without any advertising, it generates £20000 VAT paid by Amy.
If the same tour is sold by Mike, for the same price of a 100k, but with £50000 worth of Google adverts, Mike pays only £10000 VAT with Google paying £10000 too. Still adds up to £20000.
Fact is, Google are using the UK's infrastructure, our commons, our laws, our police force, our army, our NHS, our roads, our telecommunications, etc. to do business. And need to contribute to it. Plus we tax economic activity to support our welfare systems for our society and Google/Facebook/etc. are circumventing that.
> VAT is only paid once by consumers for products, advertising is a company expense that simply shifts the VAT one level down the chain. It doesn't get applied at every level on the supply chain, it gets passed down.
That's one way to look at it. Another way is to see it as a tax paid by each supplier based on how much value that supplier has added to the supply chain - a sort of 'value added' tax, if you will.
> So if Amy's Amazing Tours sells a £100000 tour round London, without any advertising, it generates £20000 VAT paid by Amy.
> If the same tour is sold by Mike, for the same price of a 100k, but with £50000 worth of Google adverts, Mike pays only £10000 VAT with Google paying £10000 too. Still adds up to £20000.
In this example Amy contributes £100k in value, Mike contributes £50k in value and Google contributes £50k in value. Essentially Google has allowed the UK government to collect the same amount of tax even though Mike has produced only half as much value as Amy. Isn't that nice?
OK fine - the consumer pays VAT. In that case I would say that Google performs a certain amount of work and as a result consumers end up paying more VAT. I'm pretty sure that if Google stopped displaying ads in the UK then the total VAT collected by the UK government would shrink.
Is this tax structured in a way to prevent collection from the consumer, so it appears as a line item next to VAT? If not, the difference will be moot for most consumers.
>This new tariff exists solely because the EU can't compete on technology and needs to raise barriers.
I'd argue it's a shield against unfair competition. US tech companies have a huge first mover advantage. They use that advantage to attract foreign talent and employ that talent to extract value globally. It seems reasonable to expect a financial contribution for access to foreign markets given the quasi monopolistic quality of US tech firms.
It is meant to be a popular proposal that will win lots of likes for the EU, but it's stupid on the face of it and it will end up comically abused. E.g. companies could create 2 resellers across europe, split the revenue and avoid the tax. It's not less brazen than their current dodging schemes and it just shows the impossibility of taxation under global free trade. It's also very passive aggressive, if they wanted a tariff they should impose a tarriff.
> companies could create 2 resellers across europe, split the revenue and avoid the tax
That's exactly the point of taxing revenue: under a profit-based taxation scheme you'd end up with a net profit of zero. Revenue taxation schemes would double-tax this setup.
> meaning they have a strong incentive to increase usage of digital services and a disincentive to put in place regulatory measures that would decrease adoption and harm growth.
They have an incentive to increase revenue; you can do this by increasing the rate much more easily than promoting growth. The only thing working against this outcome is EU institutional inertia.
Why are a large amount of people treaing access to other nations markets as a human right? I can see the argument behind saying you should have access to your local market be realtively free, you have to live somewhere, and you and your local societies interests are relatively aligned.
However,when it comes to foreign markets many people here seems to want the best of both worlds. It's a paraphrase but it seems like saying "let me work however I want in your home, but don't limit me at all", seems to be the rallying cry.
As a response to several people stating that free trade is better for everyone.
I've taken economics courses, I understand how free trade is better overall. However, those calculations only work when both sides follow the same rules. Once you have different groups of people with different values, whether it's the EU valuing privacy, China valuing domestic production, or the US valuing intellectual property, absloute free trade seems to break down.
You can't freely trade if you're using different units
No it never breaks down. Milton Friedman commented some 30 years back to the typical "we should have higher tariffs on steel, because its unfair that the japanese are subsidizing their exports".
His response? "Well that benefits the American consumer tremendously... we are sending them pieces of paper(dollar) and we are getting hard goods in return at a significant discount". If you think in in the absolute terms, wouldn't you want to trade a silly paper for steeel/cars/whatever?
Also, where does the Chinese go with these dollars? Definitely not the Chinese store, they take Yuan. How about Japan? Nope, they take Yen. So...who takes dollars? At some point they have to come back and spend it either directly(investing/purchasing american goods) or indirectly(trading dollars -> random currency) which then leads the other party holding dollars to go out and buy American goods.
It breaks down when near monopoly is established, which is often the goal of these government subsidization programs.
Whether that is acceptable depends on your opinion on global interdependence and national security. If the USA is dependent on Chinese and Russian steel to survive, it’s that much harder to defend against provocation. See EU and Russian gas for a great example.
ooh way late response! That is actually the opposite. Friedman also addressed that point. The case you are presenting is essentially "we shouldn't rely on foreign XYZ too much, we should have our own manufacturing".
Well sure we should have our own if its able to compete freely. But its never been the case that if we go to war with China, the Japanese/India/whomever couldn't start producing more steel and selling it to us. Sure it might be slightly more expensive but it wouldn't paint the picture that you are proposing. If anything MORE producers of steel would pop up willing to sell at a higher price. Crazy theres this thing called supply/demand.
As for the EU/Russian gas example, Russia isn't the biggest producer of gas in the world. According to wiki[0] its the U.S, there are other non-Russian actors in the top 10 list who I'm sure would be willing to provide gas at a higher price.
As to why you mentioned EU/Russia is that Russia so happens to have a nice giant pipeline ready to provide gas into the EU. Well...last I checked there were millions of barrels of oil being shipped globally by ship. Would you have to pay a bit more for energy ? Sure. Is national security critically dependent on Russia ?
No, because I guarantee you if Germany started paying $200/barrel of oil(or natural gas/whatever) all the oil ships around the world would reorient themselves to deliver to Germany. Crazy world called supply/demand. You now have near infinite suppliers.
Given time industry would adapt, but the impact can be devastating in the short term. EU gas dependence was and still is a big factor in the annexation of Crimea and politics across the region.
The BBC reports that this dependence is still growing, further tying the hands of the EU against Russian aggression.
Now if Russia itself was just another western style free market democracy, dependence wouldn’t be such a national security risk.
Unfortunately with econ, our tools are maths, stats, logic and reasoning. We can almost never do actual experiments, which is fundamentally necessary for science. In my opinion, an unpopular but correct description of the state of economics is that the best economists are the ones who are able to make the arguments which others value the most.
The more diverse are the people trading, the better trade works for improving everybody's life.
Where it fails is when there are market failures. Like when you have a naturally the winner takes all dynamic, asymmetric information, and some shady government intervention.
And, of course, the communications market is full of all of those.
Isn't it still free trade having to comply with local regulation? As long as those regulations treats foreign companies/products the same as local ones, of cause.
Import taxes or valuing domestic production/owners are not, but i don't see a problem with requiring food not to contain toxic stuff, no matter what country it comes from.
Exactly... I'm in favor of free trade, but only when it's reciprocal. I'm also in favor of breaking down regional locks or limits in sales... if you as a company are allowed to produce in a cheaper country, then I should be able to buy/import at the price you sell in those countries.
That’s not true and if you can believe that after taking several economics courses it speaks poorly of your teachers.
The main benefits of free trade are in specialisation. People specialise in what they’re good in and trade for other goods and services. Specialisation leads to greater efficiency, meaning you can do the same with less, or more with the same amount. Notice the complete lack of the words domestic production or intellectual property.
The case for free trade is that in the long run specialisation makes us richer. Units have nothing to do with it. Metric or imperial, services and goods are what they are.
He is admitting those benefits. His point is that with different tax rates and regulations the market is distorted and if anything imposing tariffs / revenue taxes is just equalising the market.
If other people do stupid things you don’t have to do stupid things too. Market distortions, different tax rates and regulations do not change how returns to specialisation and gains from trade work.
Anti-dumping tariffs are stupid because it not notnto your benefit to punish people for giving you cheap stuff that should be expensive. Being able to have different tax rates is part of the power to tax, which is part of being sovereign. Equalising the market is a fool’s game. The market is what it is. If you want to help some people or groups by all means do it, but tariffs are a very inefficient way to do it. Transfer payments ftw!
Anti-dumping tariffs are stupid because it not notnto your benefit to punish people for giving you cheap stuff that should be expensive.
That is only true in a very simplistic model. If a country sells for example cheap subsidized steel you may lose your steel production capability because you are not able to compete with that price. But once you lost that capability it may become prohibitively expensive to regain it because the initial costs to rebuild the knowledge and infrastructure is going to be much higher than the marginal costs for an established industry and you would have to accept, at least to some extend, which ever price they ask for. The other country may also be able to offer a lower price due to externalities, for example exploitation of their workers or environmental destruction, and you may want to compensate for that.
If you’re not able to compete with a price that’s the market saying you’d be better off doing something else with those resources. If you suspect that the price is due to subsidy, great, free money. If you want to maintain domestic production capacity subsidise it. If you want to reduce startup costs pay to mothball a plant. If you want to maintain expertise subsidise the salaries of citizens who go abroad to learn about or work in those industries.
As far as externalities go you certainly have a point but if you feel you have a right to tell other people and countries what to do, go ahead. I don’t think there’s any reason to stop anywhere between sovereignty and colonialism. Those positions are coherent, the ones in between aren’t.
Well, it is not free money if I have to spend money to protect me against potential future negative outcomes of that free money. And where would the money come from to mothball a plant? Naturally that would be from anti-dumping taxes on the subsidized goods causing the issue, wouldn't it?
And I would almost never suggest to tell any other country what to do - even though I would consider that legitimate within the right framework because sovereignty is not an absolute right - but I certainly have no objections against and am actually for putting taxes on foreign goods if those were produced according to standards I do not agree with.
The free money is the subsidy that is the reason usually avowed for anti-dumping tariffs. Choosing to mothball a plant is a choice, not something that automatically happens if some other country chooses to subsidise one of their industries.
Revenues and expenditures are both fungible. In the end one goes into the state’s coffers and the other goes out. In no sense worth mentioning would taxes from anti-dumping tariffs fund subsidising domestic production or mothballing a plant. The costs, benefits and consequences of tariffs, subsidies on domestic production and mothballing should be considered not as a unit but as three separate policies with no necessary relations. If one, two or three of them make sense by all means do them but the idea that one can fund the others is just a desire for retribution looking for a justification.
The free money is the subsidy that is the reason usually avowed for anti-dumping tariffs. Choosing to mothball a plant is a choice, not something that automatically happens if some other country chooses to subsidise one of their industries.
Sure, in the general case, but I don't think we are debating the general case, at least I wasn't. If this other country just had a ton of useless money laying around and felt particular altruistic wanting to provide cheap steel to the entire world, nice of them. Also people would probably not be too worried about imposing tariffs.
But that is not really the case that people worry about, they worry about countries subsidizing goods to hurt or even destroy your industry and making you dependent on them even if prices rise above what you own industry was able to provide before. Unless you are willing to accept this or at least take the risk of this happening, you now have a link.
If the price difference is small enough, tariffs will equalize the difference and you might not actually collect that much money from them because buying from the local industry does not cost more. If the difference is large enough, you might decide to capture part of it with tariffs and use that to mothball your plants as protective measures and still profit from the additional difference.
Also note that I am assuming that production costs are comparable before any subsidies and that there are no other strategic interests for maintaining an industry locally which of course will change the equation again. Even if that other country can legitimately produce steel at a better price than you, say because it has a lot of easy to mine iron ore, you might still put a price sticker on becoming dependent on that country. If you consider the relation potentially unstable, then you might not want to put all your eggs in that basket.
> But once you lost that capability it may become prohibitively expensive to regain it because the initial costs to rebuild the knowledge and infrastructure is going to be much higher than the marginal costs for an established industry and you would have to accept, at least to some extend, which ever price they ask for.
This has literally never happened. People keep bringing up this objection, but nobody can point to a single instance of it ever happening. It's irrelevant.
How has it not ever happened? China, who essentially blocked Google, Amazon et al, now have Baidu, Alibaba, Tencent and other massively successful tech companies, while EU is stuck with aforementioned monopolies with near-zero chance of a local competitor competing with them.
Google, Amazon, Microsoft etc. are still there. The US can still produce steel and computer chips. Other countries subsidising domestic production of software, steel and computer chips did not lead to the US being unable to do so.
And amazon is pretty big in China, taobao and jingdong are just bigger and better.
Yes, they are still there, but the protectionism is what allowed the local companies (Baidu, Tencent, Alibaba etc) to compete initially and be better in the end. Whereas in EU, local competition has been crushed and it is now stuck with the monopolies.
Baidu is still not better than Google, even in Chinese, for what it’s worth.
Infant industry protection may make sense in some cases but it’s more commonly used as a smokescreen for corruption. It was used as a justification for high tariffs and low quality domestically produced goods all over the world throughout the 50s to at least the 80s.
If the EU doesn’t have much in the way of domestic IT companies so what? They’re still rich. The fact that others are getting rich in other, different ways does not make them poorer.
It's happened multiple times. Companies attempting to reshore manufacturing have run into major problems with skilled labor and with modernizing lines and processes.
The case for free trade does not care about borders. It cares about consumption, which there will be more of if things can be produced most efficiently. Things can be produced most efficiently with maximum specialisation, which is likeliest with free trade. Domestic production can be consumed more easily than foreign production so it is more valued because transport costs are lower.
The border between San Francisco is as relevant as that between California and Nevada, or the US and Mexico.
There are certainly things where it’s good to have domestic production, vaccines for one. But the argument is grossly overused. The wool of angora goats is protected in the US as of military value.
Trading for what you need has worked out well for plenty of countries. Switzerland, Luxembourg, Costa Rica, Bahrain, Singapore, Hong Kong, my native Ireland.
Overrating domestic value creation is how you end up being a third world country. I think you are oversimplifying free market dynamics. Free market doesn't magically create optimal results for consumers (see monopolies and the resulting lack of competition and suboptimal results for consumers as one example). Similarly it doesn't magically create optimal results for maximising the well being of a country.
> It cares about consumption, which there will be more of if things can be produced most efficiently.
This is part of the problem. Production doesn't occur in a vacuum, and the most efficient methods of production are often either terrible for the workers, terrible for the environment, or terrible for society.
Pure, unfettered globalization would be ideal if the goal was production and wealth generation maximization because it maximizes the labor pool and capital allocation efficiency, but those shouldn't be the only things that governments and economists worry about.
If you look at where most of the world’s wealth is produced and how your worries may be allayed. The US and the EU are almost half of the world economy by themselves. Add Canada and Japanand you’re comfortably above half.
If there are problems caused by economic growth the products of said growth can buy solutions to them.
> Why are a large amount of people treaing access to other nations markets as a human right?
Why would you want to restrict (economic) interaction between two parties just because they’re far away from each other?
I’m sure some of the local companies in my area would love to prevent me from buying goods elsewhere, but why would I want to buy goods elsewhere unless they are either cheaper and/or of better quality?
In my opinion, your quote misrepresents the situation. It’s not about “giving someone access to a market”, it’s about not restricting trade between two parties because it’s assumed those two parties are intelligent human beings who choose to trade with each other for a reason, and restricting this activity only helps inferior companies who are unable to market their own goods.
There are at least two reasons why a locality would want to impose taxes on a foreign company.
1) The foreign company is using loopholes to dodge taxes à la Amazon having dodged sales tax for decades at the expense of local retailers who have to charge sales tax.
2) Protectionism. A specific tax to give local competitors an edge in order to promote the development of local businesses. The rationale behind is this is to trade off the advantages of a "better" foreign offering in order to develop a local company that has more incentive to reinvest its earnings into the local economy. An example would be India heavily taxing Apple products to produce iPhones inside India so that a bulk of the money spent would go back into the Indian economy in the form of wages for factory workers, instead of going to the US and China.
Another example is US and Europe protecting the interests of Boeing and Airbus respectively due to the national security importance of the aerospace companies.
In some cases if another (single) country invents the wheel and thus controls the world's supply, your country would benefit from importing the wheel and selling the other country the axel. But as it turns out wheels are very useful and if the other country has a near monopoly on it due to scarcity, your country would opt to reinvent the wheel so they have the ability to produce the whole wheel and axel combo within the borders without being gouged for price.
If I'm in the UK and choose to buy something from Amazon, it will be shipped from a warehouse in the UK owned by Amazon.co.uk Limited.
However, I pay my money to Amazon EU Sarl which is based in Luxemburg. This company is a tax shell, it contracts back to amazon.co.uk for the fulfilment. The Sarl keeps all the profit.
According to this https://beta.companieshouse.gov.uk/company/FC032354/filing-h... (see full accounts, which ironically are served from AWS), the SARL made profits of €481m in 2016. Futher down the PDF we see they are involved in a number of tax disputes about this.
Fundamentally if I buy goods from a .co.uk website that are shipped from a UK warehouse, it is very hard to argue that the profit should be counted in Luxemburg.
Noone is restricting trade, they are simply saying that the fact that you are "far away" doesn't give you the right to dodge taxes that local companies have to pay. If anything it levels the playing field.
It is the government that is threatening force (fines, jailtime) if the company/people do not hand over a portion of their hard earned cash.
These same thieves/politicians are the ones that wrote the laws and made these exceptions.
The companies are under an obligation to their families, employees, suppliers, shareholders, and the community at large to maximize value.
Or so you think that a government committee could build a cheaper, better, nicer iPhone?
Do you think a group of bureaucrats would make a cheaper, better, more efficient Tesla Vehicle?
We laugh at this, because we know the government is a bunch of people that on the whole have never employed people and created value from launching their own businesses. They do not know how to maximize wealth creation.
Why do we think that the government raking in Billions more is going to be put to create better, faster, cheaper and more efficient goods ands and services than a company like Tesla, Apple or Amazon?
Here's what's going to happen:
Billions will be raked in. And billions will be spent on duds. Look at Canada spending 1B on a scheduling app that got scrapped because government workers didn't give a shit.
Look at US gov spending on the billion dollar website.
The money will go to the pockets of more lobbyists, politicians, and will flow back to the companies.... and less quality service will be delivered , and at a higher price.
These companies employ so many people (who pay income tax from said revenues) and all kinds if intermediate taxes are paid in acquisition, and distribution of raw materials to final product to the door of the customer.
Quite literally a $700 iPhone would cost less than $200 had the government not levied/taken profits at each step from:
Land development, ore mining, glass and silicon manufacturing, assembly, distribution, packaging, shipping.
And then they want to stifle growth further and take a 3% cut of gross revenues?
I'm all for their cut during trade and VAT (20%!) But taking your hard earned profits to spend in wasteful ways while lining the surveillance communist state's pockets via broken and inefficient products is disgusting.
This will not end well. The EU is well on it's path to full blown centrally planned totalitarianism and communist level controls. You will see.
Usually when you want to find a "loophole" or "mistake" in the predictions of conventional economic theories -- like the idea that free trade is good -- it makes sense to start looking at the sorts of things we already know that neoclassical economics has trouble with: asymmetric information, externalities, and human irrationality. Asymmetric information isn't generally a major issue when it comes to imports (and if it is, you use inspections, not taxes), and with a few exceptions (like the reputational status of Cuban cigars or French wine) human irrationality isn't either, but externalities can be a big one. When you look at, say, steel tariffs, there are relatively few positive externalities, and plenty of negative ones, associated with steel production, but for another industry like IT, the externalities may be positive, such as promoting technical know-how among citizens.
So in the specific case where having a local industry brings positive externalities, I think there may be a case for some limited forms of protectionism, but even these can be misapplied. In the specific case where countries want to promote "white-collar" industries, such tariffs should only apply to end-consumer products, never to products which are sold to businesses, because usually the farther along you are in the supply chain, the more "educated" your profession is, with a few exceptions. The most compelling positive example comes from China's development of its own Internet services like WeChat, Baidu etc, which stemmed directly from China's exclusion of Western competitors like Google, Facebook, and historically Visa/MasterCard, and which may have promoted the growth of an IT industry in China. For a negative example, Brazil's tariffs on video game consoles are devastating for Brazilian video game developers, because their potential market is eliminated. Even in this latter case targeting a consumer product hurts domestic businesses. Another case is when positive domestic externalities are replaced with negative foreign externalities, such as when considering carbon taxes on imports.
This is all just speculation, of course, except the part about border carbon adjustments, which has been the subject of serious analysis:
This is not so much about the interaction between the two parties, but aboutjust taxes.
if companies can go wherever taxes are the lowest, without impact on profits, there will be a race to the bottom in corporate tax laws.
In order to have an optimal amount of taxes for tech companies that can move at a whim, you need some sorts of capital controls that prevent that.
Sales tax might be lean in 1 jurisdiction but if you make companies pay it globally it's not. Huge amounts of complexity and many many jurisdictions. In some countries, even cities have sales tax not just counties or states. It would be a multi-million dollar project for a small company that does business worldwide online to figure out how and what to collect and pay in every jurisdiction it's customers are in and then file and pay the taxes to each entity.
> Why would you want to restrict (economic) interaction between two parties just because they’re far away from each other
I think the fundamental difference in view is on the one hand seeing two parties as individuals that should be free to have this interaction.
On the other hand as two individuals in a society, whose ability to even consider having the interaction comes from society providing the means (infrastructure, education, legal frameworks, ...) and that the idea of individuals doing interactions on their own isn’t even a reasonable concept.
Reality lies somewhere in between but I subscribe more to the latter.
This is essentially Trump's argument against free trade. Your companies makes so much money in America and you don't have any rights here, why shouldn't we restrict you?
Free trade isn't some right, it's just better for everyone involved
> Free trade [.. is] just better for everyone involved
How are zero-rate imports better for everyone?
The consumer saves money. The government loses sales tax revenue, loses income tax revenue from the people that could have made it locally, has lower employment rates.
Buying locally doesn't always make sense, but often you can make an economic argument that paying slightly more for something made and sold locally is better for the consumer too.
> Buying locally doesn't always make sense, but often you can make an economic argument that paying slightly more for something made and sold locally is better for the consumer too.
9/10 times this isn't correct. If you live in an urban capital, sure. If you live in somewhere more rural, oftentimes the only local makers in the area will be rather terrible, and a large company will have a better warranty almost all of the time.
> The consumer saves money. The government loses sales tax revenue, loses income tax revenue from the people that could have made it locally, has lower employment rates.
The consumer has a higher chance of the product they bought having support in three years.
> How are zero-rate imports better for everyone?
More opportunities for the consumer to buy things, more incentive for the company to entice customers with benefits, government isn't "everyone," and they still benefit by more net units sold because they can tax on-sale still.
By local, I mean national, or state, depending on where your taxes actually go. Not necessarily from your next door neighbour.
But I think we're looking at this from different aspects. I was considering self-imports (eg Alibaba, some Ebay/Amazon sellers). You're considering big-box-Chinesium-imports vs something made by a local mom-and-pop. You might get better support from the big box longevity but that might be more reason for protectionist policy, not less.
If you compare buying imported crap from a big-box to importing it yourself, you're paying the big-box for your "free" warranty. They build it into the price. But 30-50% of your cash is ending up offshore with no benefit to your own economy.
> If you compare buying imported crap from a big-box to importing it yourself, you're paying the big-box for your "free" warranty. They build it into the price. But 30-50% of your cash is ending up offshore with no benefit to your own economy.
That's the brilliant part of free trade—in total, the amount gained by exporting will generally equal or be greater than if you were to tax on imports.
Lessening consumer options is almost never a good thing.
There's a bit more to "support" than a warranty. For example: if a person buys a piece of software, they should reasonably expect it to last until they move onto an operating system incompatible with it, no? What if an API the program uses is deprecated/removed for security reasons, ala Microsoft Gadgets.
There's also the problem of long-term customer support. Your average user uses CS at least a few times over the course of the product's lifespan.
A person who lives in Estonia or Poland doesn't even have a company creating say, a smartphone. They aren't competing with anything, so why punish both the company and consumer for getting a necessity in the modern age, a smartphone?
The impact of globalization against rural communities is one of the biggest reasons why there is the anti-globalization push. Sure, local makers may not be as nice as a large company, but when items are shipped from overseas instead, jobs and manufacturing are no longer pushed to rural areas anymore, leading to big cities being the only areas to grow.
I am ok with free trade, as long as it also apply to freedom of movement of capital, goods, and people, and we have a common set of rules, and a common court that applies them.
This is fantastic and I am all for it.
Even if this gets passed on to the customer, it ends up in infrastructure and the kind of things the EU does well.
I'd love to see more of this.
If the international conglomerates had wanted to avoid this, maybe they wouldn't have dodged taxes like they did in the first place.
Brilliant and long overdue.
My main worry is that countries which capitalise on enabling the tax dodgers (cough, Ireland, cough) will vote against this.
Well, I think you are making a very valid point. Germany and France sure like throwing their weight around and have earned plenty of appropriate criticism for their actions. They will most likely continue to do so. Just like with the US on a global level, large, influential economies will often bully smaller ones into situations favourable to their own goals.
I do not know what the point of the European Single Market was. In fact, I'd be interested to hear someone with the know-how tell me. Was it to create a trading zone where the same rules applied to everyone? Or was it just supposed to ease trade across borders by creating some kind of customs framework and abolishing tariffs, etc.?
Now the point I was making wasn't specifically about Ireland. I could have said Italy as well. I just wanted to point out that paying taxes is a huge deal. Not just for filling the coffers of the European Union, but as a symbol of everyone paying into the social contract.
If people see nothing but giant corporations exploiting the legal systems of countries to dodge taxes, people think they could do so, too. It disenfranchises the populace and just ends up giving more rise to populism, which is possibly the biggest scourge on society at this moment in time. Populism leads to fascism. The whole tax malarkey plays into this. It's not the root cause of populism (not sure there is one) and it's certainly not Ireland's fault that they managed to attract business through favourable business tax rates, but something needs to be done about the blatant tax avoidance by these international players and I think this is a good first step, which will surely see some refinement down the line.
So, again, I think you make a valid point, but I also believe that my original point stands also.
By the way, there's one country that was afraid enough of tax regulation that they fooled a sufficiently large proportion of their populace into voting for one of the most insane political decisions of the last decades. In a non-binding referendum, which is somehow, miraculously, being implemented with a kind of fervour and passion not seen since the Apollo program. (While actually important societal issues would never be put up to a referendum and even then, if people voted the wrong way (aka, against short term financial gain, or archaic doctrine), would simply go ignored. Hmmmm....)
I do not know what the point of the European Single Market was. In fact, I'd be interested to hear someone with the know-how tell me. Was it to create a trading zone where the same rules applied to everyone? Or was it just supposed to ease trade across borders by creating some kind of customs framework and abolishing tariffs, etc.?
I'm kind of glad someone asked that because the answer is pretty interesting, and not surprising given history.
It started as the European Steel and Coal Community as a way for nations that had been at war with one another to pool together power and steel resources (those engines of war) to make it harder or impossible for war to recur. It was France and Germany who essentially created it, and it included the Benelux countries. I believe creating a common economic powerhouse against the, at that time, giant newly invincible United States was a factor too. This was all in the backdrop of WWII.
> I do not know what the point of the European Single Market was. In fact, I'd be interested to hear someone with the know-how tell me. Was it to create a trading zone where the same rules applied to everyone? Or was it just supposed to ease trade across borders by creating some kind of customs framework and abolishing tariffs, etc.?
Not that I have "the know-how" :), but my understanding is that the point was to ease trading. This is both done by abolishing tariffs as well as unifying regulations. If you can sell a product in your own country, there's a high chance that you can sell it anywhere in the EU – this promotes trade.
>So this is money made from EU based users and revenue they make from them.
That's a gross oversimplification. Especially with the internet, it's not clear anymore.
Let's say that I live in Thailand, have US citizenship, sell products on Amazon in England, ship to France, and then advertise on Google. Who do I pay taxes to and at what rate?
Provenance of profit is not easy. You're paying Amazon a cut for shipping/fulfillment, and Google for the ad revenue, but your customer is a French national and you're a US citizen but currently residing in Thailand.
It's pretty clear. You are selling in the UK so the revenue would be taxed there. Post-brexit the French customer will pay customs duty.
The Google ad revenue will be paid by Google based on the market. So the ad run in France generates EU revenue. Doesn't matter if the payor was an American or anyone else.
If you are US citizen then you pay world wide income tax. You can deduct foreign taxes paid up to a limit. Better to actually incorporate though so you can pay less tax.
> Post-brexit the French customer will pay customs duty.
Out of interest: Would they? This is an EU law, so that would assume UK kept it after brexit , either specifically or through some wholesale “fork all the trade laws”. But it would also imply a lack of inter-European treaties, i.e. fork the laws but don’t keep the treaties.
I haven’t kept fully up to date with the latest brexit developments , are we far enough along in the negotiations to know this stuff yet? Last I heard it was still a complete s*show :/
IIUC, all trade from UK to EU will be subject to customs checks & tariffs, because the UK government is more likely to collapse than accept continued membership of the single market/customs union. Simultaneously, the UK government lacks the capacity to enforce significant customs or border checks in the other direction, so will accept almost (but not quite) all imports from the EU blindly.
The default on EU imports is customs duty. Certain countries (iirc Switserland, Norway and a few others) have trade agreements that waive the fees both ways.
I assume at time of brexit UK will have such a treaty, but it isn't guaranteed.
> It's pretty clear. You are selling in the UK so the revenue would be taxed there.
It's not clear at all. Your warehouse is in the states (or where ever) and the goods are never in the UK.
For all cross-border shipments you have to pay customs tax. Just because somebody saw your product on a co.uk website you have to pay the UK for what exactly?
And as you brought up, there are customs taxes as well as income taxes. Why are these artificial delineations good for business?
Bouncycastle (a crypto library) is hosted in Australia because I think the US crypt laws want to ban the export (download) of military grade munitions.
Great Gatsby (the novel) is free to download if hosted in Australia. In the US, the copyright laws forbid the download of Great Gatsby mainly because of Disney. Ever wonder why Mickey Mouse isn't in public domain?
Also, if your product that you can source cheaper over in the US is only popular in England, you would of course go to England's Amazon and eBay sites to sell it. For instance, umbrellas won't sell as well in Arizona as they would in England.
Is hosting not analogous to warehouseing? I mean if you warehouse pot in the us and sell in Amsterdam you're still violating local laws based on where your warehouse is and if you host the great Gatsby in the us to deliver to Australia then you're violating local laws where you are hosting too.
You can reverse it and have pot in the Netherlands or great Gatsby in Australia to send to the US, but weve had the term smuggling to cover that situation as well
It's not clear what is and what is not being hosted. Let's take Google for an example.
Google has datacenters all over the world. You could make a case that Gmail makes no money on its own, that all the money comes from ads.
Fine, host all the servers that serve Gmail on its own in a local country to reduce latency, and serve all ads from a server in a tax haven.
Who do you tax? The tax haven has no taxes, and Gmail itself is a net expense, as you have to pay for labor, servers, power, and bandwidth.
> You can reverse it and have pot in the Netherlands or great Gatsby in Australia to send to the US, but weve had the term smuggling to cover that situation as well.
That is incorrect. You can download Great Gatsby instantly in the US right now[0]. Project Gutenberg prevents German users from downloading books[1].
All these extra laws are doing is making it so new companies have more hoops to jump through and large existing companies have the lawyers and money to figure out how to skirt the rules.
So if you're using the legal or perceptional advantages of trading "out" of Australia (or the UK, or wherever)... why shouldn't you be subject to laws, including tax laws, there?
That is what the VAT, customs, and personal income tax is for.
It's relatively easy to keep track of just where money comes from for a purchase, and where stuff is delivered. If you actually reside there and use the services that's one thing - and you can tax the purchase for the purchaser. Taxing sources is far harder, and virtually impossible for virtual goods.
Should we tax CNDs for a percentage of Netflix and Amazon traffic they serve? Or should companies figure out exactly what is or is not cached in a particular country to find their tax rates?
I genuinely don’t see how you find this so confusing and you’re using wildly disparate examples that don’t all make the same point. I’m not interested in taking part in this outrage feat.
I see you're not interested in having discourse. I genuinely don't see how you don't find this confusing. Is just having a co.uk web address a reason to pay taxes there? There are many locations associated with you these days. The one you're living in, the one your business is in, the one where your goods are manufactured in, the one you store the goods, the one your website is hosted in, and the one that you declare tax residency. Please explain to me what proportion of your taxes should go to each one.
> You can't even keep your own examples straight, no wonder you're confused.
Not at all. The market your product reaches is important.
Hosting and domains, not as much. Selling on the amazon.co.uk market is just like selling on amazon.com. Except you have to deal with less hassle when actually shipping to UK buyers. What part of that is confused? Please respond. You're resorting to ad hominem attacks.
I don't think you understand how international commerce actually works. If your warehouse is in the USA and someone from the UK orders from you, you can ship the product to them tax free but they will pay an import duty on that item based on the UK value of the item. Google has to pay tax on the advertisement to the UK buyer. This is because the revenue (aka the user clicking on the ad to buy your widget) was advertised in the UK and thus generated revenue in the UK. That's what the 3% tax is on. It doesn't matter if you hosted the ad in the USA or Thailand or on the space station. All that matters is that the consumer "purchased" the ad. The advertiser pays google the ad fee and google pays the state the tax. Simple and straightforward.
You're not counting ppv ads. If you click on a webpage, and the advertisers get some money from you clicking on the link, you're going to get taxed even though you did not really do anything?
Please explain that to me. How you can be forced into being a tax liability for a company.
> Let's say that I live in Thailand, have US citizenship, sell products on Amazon in England, ship to France, and then advertise on Google. Who do I pay taxes to and at what rate?
You know there's a technical answer to this question. But the answer is pretty predictable : everyone.
Taxes on income in Thailand.
Taxes on income in US.
Taxes on shipping, though pretty much only in the arriving port and several places your shipment might pass (e.g. the Suez Canal)
Taxes on selling in England and France.
VAT France and England.
There are plenty of companies that can help you with this. For an extra fee, of course. And don't think for a second states will help you figure out taxes for free, or even mention/warn you that you need to do it.
Is it financially and logistically realistic for any normal sized company to do anything other than ignore the situation and fraudulently forget about taxes ? No.
What will European states do about that ? Nothing. Well, unless you count utterly destroying a few unlucky token merchants.
> You know there's a technical answer to this question.
Not really a satisfying one, as you pointed out.
> Taxes on income in Thailand.
> Taxes on income in US.
Well, you don't have any income. You send all your profits to a shell company in some tax shelter somewhere (Isle of Man is an example) and only withdraw what you need for day-to day expenses. You can pay taxes on the income sitting in the tax shelter, but I can remind you of the multiplicative properties of zero.
> Taxes on selling in England and France.
> VAT France and England.
I agree with the VAT. What if you only had warehouses in a country with a better tax code, store all your inventory there and just ship to France and England. Host your servers there and use a static IP to redirect queries from a .co.uk domain to the same site with a .tv domain. What percentage of the sale should go to France, and what percentage should go to England?
What right does the EU have to tax revenue (not even earnings) from money made on non-EU citizens? I could understand an argument that they have a right to levy a tax on money created by selling services to EU citizens, but global revenues?
They mention Twitter as an example in the article, but Twitter's revenues for 2017 was $3.83 billion, and their net-earnings is mostly negative, or barely positive. So they'd be asking Twitter for money they don't even have.
This seems too crazy to pass, like the Trump tariffs, it just seems to be a footgun.
Nothing is really changing in terms of taxation. Technically, the difference is relatively small - being taxed a small percentage of revenue instead of a larger percentage of profit (yes I know it's debatable which would be ideal).
The really big difference is they can actually enforce revenue-based taxation, because revenue in a country is directly tied to the number of users/customers in that country. Meanwhile, profit could be much more easily switched around in Google's accounting books, to the point it hardly had to pay any tax in the EU.
One other thing, while many are accusing EU of doing this because of "envy", they're ignoring the fact that China is doing way worse against American companies. Not only are foreign companies taxed locally in China, and I don't think they get away with their accounting shenanigans over there, but China also basically demands that 50% of their assets over there are owned by a local company. Can you imagine if the EU said it needs to own 50% of Google or Amazon's assets on EU territory?
And then throw in the much larger tariffs for foreign imports that China has. Why isn't the media focusing on that more?
People are up in arms about China as well, and IMHO, the US and EU should take them to the WTO over unfair trade practices.
But stop focusing on Google for a moment, and consider poor Twitter. Can they really afford this tax? If you're already losing money, or breaking even, why should you have to pay taxes on $$$/user earned in the US or Japan?
> consider poor Twitter. Can they really afford this tax?
If they can't afford a simple tax on their business in a region then they shouldn't be doing business there or at all. What do you mean, "poor Twitter"? It's not a person. It doesn't have emotions or feelings. We don't need to treat it like a poor little snowflake and make sure it never melts.
If Twitter can't handle being taxed then Twitter should die. That's capitalism. You don't get to reap the benefits of a region unsustainably and not aide in the development and growth of the region. Twitter in the EU without a tax is a parasite, not a business.
It can be argued that Twitter is less a for-profit corporation and more a public-benefit corporation at this point.
Considering most EU officials communicate with denizens on it, and that it arguably costs them a far greater amount than what they'll be taxed for, it's hard to argue that they aren't already really paying tax in a roundabout way, donating computational resources to the EU to maintain stability of the Union at a cost to themselves.
Having public officials on their platform is a benefit to them (network effects), and the marginal cost is as close to zero as to immeasurably different.
It's a negative to them - loss in quality of discussions on platform, with viewers of these politicians generally using more bandwidth than the host will be able to make up with ad revenue.
Okay, let's consider Twitter. So what's this nonsense about having companies run on "break-even" or at a loss for 10 years or more? Especially when these businesses are worth tens of billions of dollars. It doesn't make any sense. In the past, such businesses wouldn't even exist. They would've died by their third or fourth year.
Same with Uber, and I think a few other companies (like MoviePass) we've seen recently that basically live off investors' money, price competition out of the market with that money (price dumping, potentially), and then get to have a monopoly on the market.
How is any of that "desirable" to have in a market, and something we should strive to enable? And if investors can afford to lose billions of dollars a year in an effort to obtain monopoly power, maybe paying an extra 3% isn't so bad.
And before we cry about these multi-billion dollar companies having to be forced to pay 3% tax on revenue, remember that in some countries in Europe even brand-new startups have to pay 3% revenue tax, and it's actually not so bad. It's obviously not ideal from a startup perspective, but it's not a complete show-stopper either. If it's not the end of the world for startups, then I don't think it is for companies worth tens of billions of dollars either. If it is, then maybe they're doing something wrong.
I’d feel a lot more sympathy for Twitter if they had a functioning sales organisation which would take money. Also an advertising product which worked even a bit. At the moment it is cheaper and gets better results to create bots on their platform than to pay to advertise.
I’m not sure that their incompetence should protect them from taxation.
Think about consumption taxes. They work in a somewhat similar way.
> What right does the EU have to tax revenue (not even earnings) from money made on non-EU citizens?
Every right. Their government, their citizens, their laws.
> but global revenues?
These companies exist globally. They would be vastly smaller and have far less impact if they did not have EU citizens. Network effects matter and ignoring them is choosing to not understand the big picture.
> So they'd be asking Twitter for money they don't even have.
It doesn't strike me they would try to collect this retroactively!
Also, I would argue that clearly Twitter should not exist at all if it cannot pay a reasonable tax in the areas where it operates.
Edit: What right does Twitter have coming into the EU, collecting data on its citizens, earning revenues from that, and not paying tax? Seems insane to me.
Edit 2: I guess all the downvotes trigger a switch, I'm not allowed to post any more on HN I guess. Bye all.
Edit 3: To the replies below, I'm not "boxed in" by some silly argument. I'm just banned from replying.
> Every right. Their government, their citizens, their laws.
If a company doesn't have offices in your country, it's not yours.
>These companies exist globally
Well, maybe the net result is to get out of the EU then, if the costs of 3% of global revenues exceed profits.
If you don't think a company that is mostly non-profit (Twitter) shouldn't exist, I feel that's a pretty pathetic position. So you're either a very greedy, high margin profit company,or the EU says you shouldn't exist?
This is not a tax on global revenues. It is a tax on EU revenues. This article does not make that clear but other articles about the subject[1][2] include that important detail.
It really is a tax on global revenues. It's a tax on global revenues that is enabled by the fact that EU residents get services for free, which enable the global revenues. But the companies are also paying a VAT/GST/sales tax on some of those revenues in nations that charge them.
Let's use lumber as an analogy. Let's say the trees are in nation A. And a company from nation B is cutting them them down to make lumber (and is paying appropriate taxes in A for licenses, employees, land, etc). Lumber which is sold to companies in nations C, D and E. And appropriate taxes are paid on those sales. The company also pays income tax in nation B. The EU tax is like nation A saying, "you're using our trees to make even more money in nations C, D and E -- pay us a share of those sales!" In this analogy, the users are the trees.
To use another analogy, it's like demanding farmers pay taxes on the revenues that McDonalds makes. It's just silly.
Sales offices are there because they do substantial sales in the region. What exactly do you think the EU will do if they remove their physical footprint and refuse to pay tax?
The answer is simple: They'll get court-approval to confiscate funds being transferred to these companies from European customers.
So the real option on the table is to stop taking money from anyone in Europe, and the European market is simply too big for that to be a realistic option.
I support whatever the UK voters support. That's how democracy works. As a US citizen, my opinion on Brexit has no bearing, although it’s not hard to understand who voted for it and why they did.
> If you don't think a company that is mostly non-profit (Twitter) shouldn't exist
It's not uncommon for monopolies to lose money on some projects as a tradeoff for destroying would-competitors. Thus the fact that a big company is not making a direct immediate profit is NOT a reliable indicator of them being benign.
I'm assuming you mean "not profitable" rather than a "non-profit", since the latter indicates an organization explicitly limited to at least ostensibly-charitable purposes.
They do already. The EU proposal is that Twitter also pays taxes on that ad revenue, on a pro-rated basis, where the users reside. This is very different.
I like your fire. I think we would have fun debating things for days.
You've boxed the parent into three positions. They're kind of orthogonal so it's hard to approach directly, but consider a hypothetical 4th position.
What if the parent hypothetically thinks that twitter is acceptable collateral damage if it means fixing some other abuse, does that make him greedy? What if he gains nothing from it?
I think I've just provided a way out of your boxes, if you disagree please let me know!
Do we make the word a better place of we cause the destruction of many life-style businesses that provide jobs, a public service, and aren't rapacious and create an environment where only the most aggressive and profitable companies can survive at all, but you get to exact a 3% tax on them?
Let me provide an alternative hypothetical scenario: Major tech companies withdraw their businesses out of EU jurisdictions. They run sales and support remotely. They close down local offices. They host in clouds that sit on the border of EU territories, enough to provide low latency, but outside taxing authority.
Now what? US Internet services still makes money, EU citizens still have access, but there's no corporate footprint. Do you really think with such huge traffic, if Google and Facebook and Twitter shutdown local offices and entities that businesses still won't advertise with them? Advertisers go where the audience is.
The EU would then face a moment of truth about whether to bifurcate the internet like China did, erecting a Great Firewall of Europe, blocking access to properties that are not in compliance.
Lest people think this is about my employer, read https://people.eecs.berkeley.edu/~daw/papers/privacy-compcon... and search from "Cromwell", and you'll see reference to work I published in 1996. I heavy subscribe to John Perry Barlow's "Declaration of Independence" of Cyberspace. To me, the internet was the first new zone of human freedom in millenia that was completely free of state interference, and the "permissionless innovation" it enabled, where anyone could publish anything that was accessible to the whole world, shook me to my core as a young teen in the late 80s when I first go on the net.
I think many people who came to the internet decades later perhaps don't have that sense of awe I do, that sense of its specialness. And this continual chipping away at that original Utopian dream with nationalistic, provincial concerns, is to me the unacceptable collateral damage.
The collateral damage I'm willing to except is some people getting away with tax evasion, if it means more freedom is preserved and we don't end up with a splintered-net-of-a-thousand rules, where I need to be concerned about what the CCCP and Brussels and Congress thinks before I publish something.
>Do we make the word a better place of we cause the destruction of many life-style businesses that provide jobs, a public service, and aren't rapacious and create an environment where only the most aggressive and profitable companies can survive at all, but you get to exact a 3% tax on them?
The 3% tax isn't being implemented because it's the best system. It's being done because tech giants have consistently weaseled their way around the normal way of taxing businesses by fiddling with transfer prices and corrupting governments.
>Now what? US Internet services still makes money, EU citizens still have access, but there's no corporate footprint. Do you really think with such huge traffic, if Google and Facebook and Twitter shutdown local offices and entities that businesses still won't advertise with them? Advertisers go where the audience is.
In this hypothetical scenario Google/Facebook/Twitter lose all their actual European clients, the advertisers. It's easy for the European states to just block the few relevant financial flows, there's no need for a Great Firewall for the users.
>I think many people who came to the internet decades later perhaps don't have that sense of awe I do, that sense of its specialness. And this continual chipping away at that original Utopian dream with nationalistic, provincial concerns, is to me the unacceptable collateral damage.
Are you also arguing for either an internet government to do internet wide taxation, or a ban on commercial use of the internet? Because otherwise what you're arguing is that tech giants should be able to use the independence of cyberspace that we both cherish to do a run around of the absolutely normal practice of taxing businesses that operate in specific geographies. If we let them keep doing that then states will end up having to put up more and more draconion barriers to the internet well beyond your worst case scenario of a Great Firewall of Europe.
> The 3% tax isn't being implemented because it's the best system. It's being done because tech giants have consistently weaseled their way around the normal way of taxing businesses by fiddling with transfer prices and corrupting governments.
No, they admit it's not the best system, that's why they claim it is short-term only. The best system would be an international treaty to harmonize corporate taxes.
>Are you also arguing for either an internet government to do internet wide taxation, or a ban on commercial use of the internet?
I'm arguing you should be taxed for the actual business you do. If I make a dollar because I sold an ad to a local company in the EU because they wanted to reach a customer in the EU, fine. That's a rational tax law. It's not rational to tax for business done elsewhere, sold to people elsewhere, for customers elsewhere, to be counted. Spotify is an EU company, do you think the US should tax them based on global European subscriber revenue?
Is internet wide taxation a bad idea? Not necessarily, but it's impractical because whose going to vote on how to distribute the revenues? Who's going to collect, ICANN/ISOC? At best you could come with a cross-regional harmonization of tax regions and agreed upon treaty on how those rates are calculated, but it is up to localities to impose and collect them.
> In this hypothetical scenario Google/Facebook/Twitter lose all their actual European clients, the advertisers. It's easy for the European states to just block the few relevant financial flows, there's no need for a Great Firewall for the users.
Really? How would they do that. It's easy to block purchasing physical goods online and have customs block it. How do you block virtual goods? Block payment processing systems? Foreign bank transfers? Bitcoin? Does the EU prosecute a local business for buying ads on Google or Facebook using a foreign bank account?
I mean, the barrier to buying stuff online, especially purely digital goods, is very low.
If companies with hundreds of billions on the line can figure out how to restructure themselves to avoid taxes, you don't think they can figure out how to restructure themselves to avoid this tax? Google and FB might just decide to pay it, but firms with less EU profits might decide it's not worth it and look for mechanisms around it.
>No, they admit it's not the best system, that's why they claim it is short-term only. The best system would be an international treaty to harmonize corporate taxes.
"No" to what? You're just agreeing with what I said. An international treaty would be a much better solution but we're dealing with companies that have already corrupted several European governments, let's not pretend getting something as grandiose as that passed wouldn't be extremely hard.
>I'm arguing you should be taxed for the actual business you do. If I make a dollar because I sold an ad to a local company in the EU because they wanted to reach a customer in the EU, fine. That's a rational tax law. It's not rational to tax for business done elsewhere, sold to people elsewhere, for customers elsewhere, to be counted. Spotify is an EU company, do you think the US should tax them based on global European subscriber revenue?
Other people have already explained that this is not what is on the table. The proposal is to tax at 3% the percentage of the revenues that pertain to EU users, not users elsewhere.
>Really? How would they do that. It's easy to block purchasing physical goods online and have customs block it. How do you block virtual goods? Block payment processing systems? Foreign bank transfers? Bitcoin? Does the EU prosecute a local business for buying ads on Google or Facebook using a foreign bank account?
Yes to all your questions. And the fact that this is escalating is exactly why you should be in favor of proposals to quickly end this exploitation of tax laws by tech giants. Otherwise the internet as we know it is in danger.
> I'm arguing you should be taxed for the actual business you do. If I make a dollar because I sold an ad to a local company in the EU because they wanted to reach a customer in the EU, fine. That's a rational tax law.
That is exactly what this plan does. It is a tax on revenue generated in the EU from digital advertising, subscription fees and selling of user data. It is not a tax on global revenue. You are arguing against a tax plan that does not exist.
Companies can close down offices and move servers as much as they like. They won't though, because the reason they open offices in very expensive European city centres is they get more than 3% additional revenue from doing so.
Similarly, the reason they pretend sales are conducted in a different country from the client, account manager and geotargeting of the ad is nothing to do with the right to publish things accessible to the whole world and everything to do with paying less tax. Content gatekeepers selling targeted European eyeballs to advertisers is at best orthogonal to the utopian view of the internet as a means to share knowledge irrespective of where and by whom it's consumed.
I've heard some pretty tortuous rationalizations for tax avoidance in the past, but inventing an imaginary Great Firewall of Europe so you can be furious at the EU asking your employer to pay a sales tax on ads is a whole new level. :-)
You are mischaracterizing the proposal. Let’s be clear: the EU has no intentions of enforcing taxation outside of their jurisdiction and of course they have every right to enforce taxes within it. It’s pretty normal stuff.
Let's say a company has their headquarters in country A. A user from country B uploads a video filmed in country C. Someone from country D buys an ad to be placed on that video, and the purchase is processed in country E, while the sales agent is based in country F. A different user in country G watches the video and clicks on the ad. The video was served from a server in country H, and the ad from a server in country I.
Are you talking about sales tax, or corporate taxes?
Out of curiosity, what makes you think it should be D, assuming you were talking about corporate tax?
With a much simpler example, if a merchant in e.g. France sells a product to a consumer in e.g. USA, the VAT/import/sales tax should go to the US but the corporate tax on profit for the merchant is taxed in France.
Sales tax, depending on the structure of the company. If a company has a solid presence in the country where the sale was made, with physical sales and marketing departments, who make the sale it will be taxed there.
This is the case for Facebook and Google in the EU.
Billing address, given a sale is involved. Bank accounts tend to be attached to an address, and they can be traced if any silly loopholes get exploited.
Isn't that an available information from the user's credit card/bank account?
Now, of course there will be people who are residents of a different country or have cards from multiple countries, but I'd expect that to be a negligible fraction.
Assuming you are talking about corporate taxes (not sales tax / VAT).
If those were all different companies (one company doing the sales, one company hosting the infrastructure, one company developing the system, etc.) doing arm's length transaction it would be much simpler, each company would pay local tax in its own profit.
We are all in this world together. It is insane that corporations have been able to reap untold profits while hardly being taxed at all. These companies could not exist without the societies of the people who buy their products. They should pay taxes wherever they do business, even if fiat currency isn't changing hands (i.e., Facebook and Twitter free users) as specified here.
Good move EU. Higher taxes on megacorps will improve quality of life globally and will ensure stronger societies that are more resilient to disaster (like the 2008 crash, or even a natural disaster). Higher taxes on megacorps will increase the probabilities of stable societies with healthy middle classes. Higher taxes on megacorps will enable more people to be entrepreneurs themselves, as more people will grow up with the resources and skills to start something of their own. It's win-win-win all around.
If the megacorps want to earn more money, they should pay more tax. They'll earn more money in the long run that way.
Edit: I'd love to reply to the comments below, but all you downvoters made that impossible. I'm now banned from commenting and replying on HN presumably from some automatic downvote ban switch. Thanks for silencing the debate downvoters and HN filters. Goodbye.
Well, tax them on the money they make from EU sales then. I hardly see why the EU has a claim on revenues made by overseas companies on non-EU citizens. How about the US levy a tax on global BMW and Benz revenues?
> I hardly see why the EU has a claim on revenues made by overseas companies on non-EU citizens.
For the same reason the US government has claim on all global income of both its citizens and corporations. [1] [2]
Corporations brought this on themselves by using accounting cleverness to "hide" billions in profits [3]. This is simply a regulatory response. Tech companies can choose not to operate in the EU as well. This gets to the crux of the problem: taxing where the use takes place, not where the corporation is located.
Let's address that when Siemens is evading taxes like US tech companies are.
I can understand employees of US based tech companies might have strong feelings about this stance. I'd encourage reflection on taxes and how they pay for societal infrastructure.
If the EU wants to pay for social infrastructure, they need to tax money made within their borders and encourage the development of their own economy. I support Google, Facebook, Apple, and other companies paying taxes on the business they do in your borders, and harmonization of tax rates and laws across the Atlantic, but not some kind of unilateral "Marshall Plan" of taxation without representation. This kind of tax scheme is just going to lead to retaliation, just like tariff trade wars.
Do you really think the US Congress and Administration will sit idly by and let the EU slap, in effect, a global 3% tariff on US corporations and not retaliate?
I fear a real storm on the horizon with all of this growing nationalism. You've got right wing movements cropping up in the EU, you've got nationalism in the US, EU, and China growing.
I don't think trying to claim extra-territorial extra-jurisdictional revenues is a legitimate tactic. And I'm pretty sure you've lose your mind if the CCCP imposed a 3% global tax on your local companies for money they made that was unrelated to exports to China.
> I don't think trying to claim extra-territorial extra-jurisdictional revenues is a legitimate tactic.
Taxing revenues derived from users in your own country is not extra-territorial taxation.
> I fear a real storm on the horizon with all of this growing nationalism. You've got right wing movements cropping up in the EU, you've got nationalism in the US, EU, and China growing.
As a nationalist in the US (which does not make me right wing, merely empathetic to my fellow citizens first), I fully support the EUs efforts to enforce taxation on foreign tech companies who have been taking extraordinary efforts to evade taxation.
I'm not sure where you suppose we should read the proposal (as it's not made public yet) but all summaries of journalists that have seen the document itself seem to pretty clearly indicate that it's indeed targeted at revenue generated from EU users only. Some even cite passages on how to determine location. If you have other information please share them.
I'm pretty sure the thinking of the legislators is taxing net income is too easily manipulated. Therefore by taxing a 'small' (up for debate) amount of revenues there's less gamesmanship that can take place when determining tax liability.
For reference, Texas charges a 1% tax on taxable margin over $1M with three options for determining taxable margin. This gives companies less wiggle room when determining tax liability
> How about the US levy a tax on global BMW and Benz revenues?
As long as those companies are pumping out gasoline cars that pollute the air and the environment around the US, that sounds like a great idea! Those companies are unfairly creating pollutants and encouraging their customers to raise the global temperature, dirty American's air, and everyone else's, etc.
I would be pleased to see the US pose taxes on businesses that are actively harming Americans.
What about the huge surplus value that Google's search engine provides society? I say we should confiscate money from everybody and give it to Google as a subsidy, because they're underpaid for what they do.
Corporations pay +20% tax on profits, then provide jobs to people which are then taxed 30-50%. Corporations are providing loads of value to society. How on earth is this not enough?
Honestly, if this is not enough money for the government to operate there are serious spending and accountability problems. A governments primary purpose is to protect rights of individuals. Its job is not to run the world. If we really want to help the middle class lets just let them keep more of the money they earn.
This is specifically targeting companies that are shifting profits around to avoid those 20%+ on profits by setting rules that are harder to work around.
There's a problem when these companies use international treaties and agreements to pay less tax than your local carpenter or grocery store or their own cleaning staff.
It's a government's primary purpose to protect the rights of individuals. What these multinationals are doing is theft on all the other players.
The EU's proposal isn't the best, but it'll hopefully spur more debate and shake us out of our current local optima, where corporate taxes for multi-national corporations are just odd. How about this proposal: tax company on a fraction of global profits, where the fraction is the fraction of revenue that was attributable [1] to the EU?
[1] - Different ways of determining attribution, but simplest is based on billing address of the customer making purchases, including purchasing ads
But it goes even further. In Germany, due to the former divide of the country, lots of big companies like Siemens or Osram have left the state where they were founded and moved to somewhere else. Because corporate tax is paid on a federal state level this means to now many more of companies pay their taxes for example in Bavaria and less so in for example Berlin. So in theory you would also need to have companies pay money on a federal state level (or be distributed somehow "equally" by a central government). In Germany we have whats called a "Länderfinanzausgleich" that redistributes some of the money between states even though that is highly controversial.
Avoidance is not evasion, so your back tax / theft premise will fall apart there. It would never survive a legal challenge.
This EU fake tax is actually a new tariff.
The EU has a $100 billion net trade surplus with the US. Germany - by far the largest economy in the EU - in particular has an extreme trade imbalance with the US in relation to the size of the trade between the two countries.
The German trade deficit is so extreme, it's larger than the total sum of all exports from the US to Germany in fact.
The US is the least trade dependent developed nation on earth:
Every nation that has a large surplus with the US, that decides to pick a trade fight, will be guaranteed to lose a lot more than the US does accordingly.
The US for example imports three times from China, what China does from the US. A trade war with China is ideal for the same reason it's going to be ideal with Germany and the EU broadly. In a perfect world, the US will import dramatically fewer consumer goods from China, Germany and overall in general. Instead the US should consume less from abroad and shift those resources to domestic capital formation and investment toward greater US production. That's further ideal at a time when automation gains will make it easier to reshore ever greater manufacturing. The vast US capabilities around manufacturing and energy, make the US uniquely positioned among major economies to not need very many outside nations.
It's pretty much obvious that the tax avoidance perpetuated by Google, Apple, Amazon and Microsoft is against the spirit of the (tax) law, even if it is not against the letter. But you are right; it would never stand a legal challenge. That's why there is this new tax.
When you consider that companies like Apple, Amazon and Google - using these tax loopholes and sandwiches - get to pay a much lower tax rates that your local carpenter or grocery store, I don't see this as a new tariff, but as enforcement of an existing one.
About the 'trade fights'; I think you really do underestimate the straits the U.S. is currently in. The only reason the U.S. can import as much as it is currently doing is because of the strength of the U.S. Dollar. The median inflation adjusted income in the U.S. has been sinking for three decades. Even more automated production will not produce purchase power, especially if the value of the Dollar suffers because of a trade conflict.
Incorporate your business outside the EU. It will protect you from unreasonable taxes and regulations. The internet has no boundaries or residency or citizenship. Especially if you are a software-as-a-service business, ignore everything about the EU and domicile outside it.
The EU will block your service's access into the EU market. That's their only possible next recourse if you simply ignore them and stay out of their jurisdiction physically (in a scenario where you continue to sell to EU customers, but refuse to abide by their policies such as this tax). They'll also go after the payments side, they'll try to shut off your ability to get the payments from EU customers.
Going down the roads that the EU is toward further centralized bureaucratic control over the Internet, they have to build their own version of the Chinese firewall to control EU Internet access eventually. There can be no other possibility if they plan to see this path through to its logical conclusion.
The critical difference here is that China is trying to block their citizens from seeing data hostile to the government, whereas the EU is trying to protect its citizens from companies hostile to its citizens.
I wish all our countries were so enlightened as to stand up to protect us from multinational corporations exploiting loopholes in the law.
They could make it so advertising on FB or Google isn't considered a valid business expense. Canada does something similar for advertising for magazines.
>There can be no other possibility if they plan to see this path through to its logical conclusion.
I foresee a future, where EU users (and users "behind" the Chinese firewall) acquire crypto currency facilitated through p2p dapps and acquire tokens to be able to advertise their products/services over other dapps to other users in the EU.
I look forward to this game of increasingly expensive wack-a-mole that will enable the next generation of economic activity with technology.
The facebook's and alphabet's may not adapt to something like this (hard to change the course of these giant behemoths), but increasingly more, newer enterprises will be incentivized to go down this path (and users within these jurisdiction who don't really care for these rules and will have increasingly easier technical access to these services).
Though of course reactionaries will be totally blind to this (their heads are in the sand) because they will be happy to see their respective local diktats pander to their world view, rather than explore the realm of possibilities that all sorts of actors may pursue.
Do you or someone else have a good idea on where to incorporate? I'm a EU citizen finishing my software based service, and while I can comply with all the EU rules after having cash flow, while bootstrapping I just can't take that risk alone.
Are there any good resources to read up on these things? Books, blogs? What kind of lawyer should one consult in the country where you incorporate?
Would opening a Delaware LLC be possible/preferable for a non-US-citizen? Or are we talking carribean
> This is why we tax profit and not revenue. Different industries have radically different cost structures.
That is completely irrelevant as long as the tax is only collected once at final sale and not every time the goods change hands within a supply chain.
If Walmart has 97 cents of cost per dollar in revenue then the sum total profit within their supply chain is 97 cents. Somebody is getting every penny in the dollar.
If the government says that for every dollar in revenue you have to pay 20 cents in taxes then Walmart will either raise prices by ~20% or require their suppliers to lower prices by ~20%. In no event do they go out of business, because their customers still need what their suppliers produce.
It's possible for a tax to destroy a market, but it has nothing to do with margins of the final retailer and everything to do with how much total surplus exists. If the government demands a certain number of dollars in taxes and either the manufacturers or customers can eat that and still be willing to engage in the transaction, that's what happens. But if there isn't that much surplus in the transaction, it no longer happens. Because before somebody was spending an hour to make a certain amount of money and after they have to spend an hour to make only 80% that much money, which can cross over the threshold where they say screw it and fold up shop. That has nothing to do with whether you call it sales tax or income tax.
It's true of any tax on any product. There are products with high margins that a small tax could nonetheless destroy because the industry is high risk, so investors won't invest without high returns. If the tax makes the risk-adjusted returns fall below what it is for other investments, the product ceases to exist despite high margins, because the high margins may be entirely necessary to compensate for the risk.
> If the government says that for every dollar in revenue you have to pay 20 cents in taxes then Walmart will either raise prices by ~20% or require their suppliers to lower prices by ~20%. In no event do they go out of business, because their customers still need what their suppliers produce.
You are assuming there is no elasticity here. People would stop working for walmart and go work for google, in this example, so yes, the tax would destroy walmart.
This is nonsense. Unless Google opens thousands of "walk-in-distribution centers" close to consumers, or 100% of commerce moves online, then there will still be demand for what Walmart sells.
Walmart sells essentials like food, clothes, and medicine. In what world does a consumer need an Android, or the internet, but not food.
Some abstract thought here: the OP mentioned only 2 companies and I responded within that limitations, but in reality walmart competes with amazon. So if amazon has higher margins than Walmart because of the business model then walmart is disproportionately hit by the tax.
> So if amazon has higher margins than Walmart because of the business model then walmart is disproportionately hit by the tax.
Still not how that works.
Suppose a knickknack costs $1 at Walmart. They pay their supplier $.50, $.47 is the cost of operating the store (rent, utilities, staff, etc.) and $.03 is profit.
Amazon sells the same knickknack for the same $1 and buys it for the same $.50 but the cost of operating their store is only $.10 so they make $.40 profit.
Now the government says they must both pay $.20. Suppose both the manufacturer and the customer are completely inelastic. They won't change their prices at all. Which store is at a disadvantage? You still don't know.
It could be that Amazon needs higher returns to generate investment because online stores are higher risk. They have more competition and lower barriers to entry, their assets are heavily skewed toward goodwill and branding which are more susceptible to damage by scandal than e.g. real estate holdings, etc. It could be that if you cut their profits in half like that, they get no investors.
Meanwhile Walmart has to come up with the $.20 out of their store operating costs, but those costs are an opportunity to cut something that Amazon doesn't have. They could improve the energy efficiency of their stores. They could lay off some greeters. They could renegotiate the lease on their stores against the fact that all other retailers will have to pay the same new tax, which reduces the market value of commercial rental property.
There is no guarantee that Amazon is the one that comes out ahead.
> Meanwhile Walmart has to come up with the $.20 out of their store operating costs, but those costs are an opportunity to cut something that Amazon doesn't have. They could improve the energy efficiency of their stores. They could lay off some greeters. They could renegotiate the lease on their stores against the fact that all other retailers will have to pay the same new tax, which reduces the market value of commercial rental property.
Walmart makes up for the difference profit margins with amazon because of volume. Reducing operating costs at pure profit is already at walmarts disposable: what they could do is reduce the quality of products (worse chain of supply, worse produce, worse items) which is in practical terms also a tax in consumers.
> Reducing operating costs at pure profit is already at walmarts disposable: what they could do is reduce the quality of products (worse chain of supply, worse produce, worse items) which is in practical terms also a tax in consumers.
What you're missing is that the tax itself may give them leverage. If there is suddenly a 20% tax on retail goods then the cost of commercial properties may go down, because the retailers need to cut costs to cover the tax and the property owners will have no customers if the retailers go out of business, so it could be the property owners who end up eating some of the tax. They may have to lower rents enough to make retailing out of their space profitable. And the same for any other operating costs the retailers have. They may be able to pay lower wages because all retailers would have to do that in order to be profitable, so wages for retail employees go down across the board and the employees eat part of the tax.
And the same applies to offering crappier service so that the customer eats some of the tax. It's possible for customers to prefer that to higher prices. And when the tax causes that to happen across the board, the customers may have no alternatives so the store may lose no business. Customers still need bread, now all the bread in every store either costs more or tastes worse, so the customer picks their poison and the store stays in business one way or the other.
> They really are distorting.
Oh, a tax really will affect two different businesses differently. But the distinguishing factor isn't the size of their margins. Profits are just a different type of cost -- the cost of raising investment capital. You may be able to get the investors to eat the tax, but they may also walk away, just like a customer or supplier might, and then you're just as out of business.
The true distinguishing factor how easy it is to get some combination of involved parties to eat the total amount of the tax and still be willing to do business. In other words, whether the total surplus is more than the amount of the tax.
If they raise their prices, people buy less, so profits are less, so its value as investment goes down, so it gets disinvested. Where would that money go? to any company with higher returns, in this case, Google.
> If they raise their prices, people buy less, so profits are less, so its value as investment goes down, so it gets disinvested. Where would that money go? to any company with higher returns, in this case, Google.
You're assuming that Google has higher returns. Higher margins doesn't inherently mean higher risk-adjusted returns. The higher margin company could be higher risk or have higher fixed up-front capital costs.
> If it was in equilibrium before the tax, the addition of the tax would favor google.
If it was in equilibrium then they would both have the same margins. Something has to be different or everything is the same.
And by far the most common reason for a company to have higher margins is that it has higher risk. Otherwise the investors would already be investing only in the business model that makes more money without any countervailing disadvantage whatsoever, regardless of the tax.
> You can have different margins and different volumes, with the same rate of profits for capital invested.
Having the same historical returns isn't the same as having the same risk-adjusted returns.
Having higher margins is a risk unto itself. A low-volume high-margin store might have the same total profits as a high-volume low-margin store, but move them next to each other selling equivalent products and you know which one is going out of business.
The lower margin businesses will raise prices, and higher margin businesses will be forced to lower prices long term as people will have less money it's not a problem.
Taxing profits encourages all kinds of undesirable behavior: buying expensive company cars, conferences in exotic locations, other perks because you get a huge discount (tax deduction) on them.
I would argue it's immoral because you're taxing both efficiency and honesty. There is no reason that out of two companies producing the same thing you tax the one being more prudent with their expenses more. Tax pollution, land, access to local work force or revenue. You can just raise personal income tax as well. They are all better and more just taxes than loop sided incentive wise tax on profit.
And taxing revenue punishes economic activity per se. For small firms, it will force them out of business, and only high margin ones will remain (as explained).
In other words, for the 2/3rds or so of the economy that is small and medium businesses this will be a tax on having economic activity at all. That's why it'll never fly (or should I say never be enforced).
And don't worry, as usual, for large businesses there's an easy way out : simply don't transact in money. Then negotiate what the value is of the transaction with the tax department. For instance, buy Disney Club 33 access for all executives and their family in trade for 10% cheaper plumbing for the park. Do huge transactions for suspiciously low monetary value, and they won't get counted in revenue, or only partially. Problem solved.
In case people doubt that such negotiation works, I would like to point out that the most powerful man in Europe, the president of the European commission, Jean Claude Juncker, got where he is by negotiating preferential tax deals with large international corporations. I'd say for years, but the guy is no spring chicken. For decades.
All taxes that are less than 100% enforced (all of them, but these revenue taxes are a particularly bad example. Utterly unrealistic to do this for small businesses) are a tax on honesty. Thing is, you can't have global supply chains without "taxing honesty". And without global supply chains, you won't get an iPad.
I think a better explanation is that taxes on revenue favour vertical integration.
Imagine a product that requires building widget A, then turning that into widget B, then turning that into widget C. If we have the following companies:
C: revenue $6m, purchase costs $4m, other costs $1m
B: revenue $4m, purchase costs $2m, other costs $1m
A: revenue $2m, purchase costs $0, other costs $1m
then taxes are paid on $12m.
If we instead have:
Alphabet: revenue $6m, purchase costs $0, other costs $3m
then taxes are paid on $6m, even though the same amount of stuff is being made with the same efficiency, same profits, etc.
Whether this is relevant for tech giants is another matter. Software tends to be quite vertically integrated (financially speaking, at least).
This is typically the argument for VAT over other sales taxes. In the EU, A would charge $2m + VAT. Let's say 10% for ease. So B would have purchase costs of $2.2m, and would charge $4.4m. $400k of that is VAT, but they get a $200k VAT refund for the VAT paid on the purchase from A. C would charge $6.6m, of which $600k is VAT, and claim $400k VAT back. End result is A, B, and C would all pay $200k VAT each.
In your second example, the VAT inclusive price would still be $6.6k, and the VAT due would still be $600k.
In practice many non-VAT sales taxes also counters this problem by trying to define what makes a "final" sale or a sale to consumers as opposed to other companies, and taxing only that.
well many people unfortunately do not understand that taxes like this get past on to everyone. most only see the tax on their receipt. embedded taxes are the greatest tool of the tax collector
this is something that gets thrown around a lot, but its manifestly untrue, if corporations could easily charge more, they would, and they would pocket the difference as profit.
Taxes in general reduce profit, they do not increase prices.
The nuance of passing down taxes is that it depends on the elasticity, which generally is about the capacity for the consumer to substitute the goods.
If you put a tax on tobacco or alcohol, it definitely gets to the consumer. If you put a tax on pork, then people switch to chicken and the producer gets hit.
As an answer big techs will likely break these companies into 100 smaller ones to avoid the thresholds?
"The levy would cover companies that have annual worldwide total revenue exceeding 750 million euros ($920 million) and total taxable annual revenue from offering digital services in the EU above 50 million euros."
> As an answer big techs will likely break these companies into 100 smaller ones to avoid the thresholds?
That sounds like a huge win to me. More competition is better for the market at a whole, and these 100 smaller companies will not be able to stop from competing with each other (or maybe we'll learn they just were better off as separate companies in the first place...)
This is what these companies are already doing, and exactly what this law is designed to address. Bear in mind, one of the top ways these companies currently avoid being taxed is to claim they had no profit... because Google France had to spend all it's supposed gains licensing permission to call itself "Google", a trademark of the US company. (Apple, Microsoft, etc. all do the same.)
If so, then they really separate companies, not just different on paper. Their ownership of the different companies will eventually diverge from each other and the companies will need to compete with each other to satisfy their owners.
If not, then the taxman will probably be smart enough to send the bill to the parent company instead of the mini-Googles.
>> If so, then they really separate companies, not just different on paper. Their ownership of the different companies will eventually diverge from each other and the companies will need to compete with each other to satisfy their owners.
You don't get it... the tax man proved not to be that smart to send the bill to the parent company. You may want to google: "What is a shell company?"
Shell companies work because it allows them to shift profit around. That is exactly why this proposal goes after revenue. The problem is not identifying ownership.
If there is no parent owning the child companies then that should work. But obviously if there is no central parent owner there is no being a “giant” with the benefits that brings.
Just breaking a company in 10 parts owned by a parent doesn’t make any difference. Revenue would be counted at the top (or the idea is pointless)
Not prescient. It was exactly one of the primary reason for doing it: not being considered a "monopoly" or to make people not think so much that "Google" owns everything.
The state of Washington has a very similar concept: Business and Occupation tax. If you have nexus you pay taxes on local revenue. That’s in addition to the sales tax. The tax rates vary by industry, mostly a fraction of a percent.
I don’t know how successful the giants are in dodging taxes though. Perhaps they are trying to setup “independent” out of state entities that handle all of the sales.
There is also a trend afoot that pushes all businesses to pay sales tax across the entire US, nexus or not. The idea is that modern software makes compliance easy across all local tax regimes, so the old excuse of unmanageable complexity is losing its power. I don’t know the details though. So We might end up with the idea of nexus being deprecated too.
[...] Nexus, also called “sufficient physical presence,” is a legal term that refers to the requirement for companies doing business in a state to collect and pay tax on sales in that state. [....]
I think the tax should be on profit based on where the users are located not on gross revenue.
This looks more like a capitulation in the fight against various tax evading schemes employed by these companies. Isn't possible to just give a broader EU law that criminalises this kind of schemes?(i.e. draining the profit by various means). I'm sure that as soon as a bunch of executives along with their lawyers are put in jail this madness would stop.
Profits are always shifted legally. For example Google Australia is separate entity from Google Ireland. What Google au might do is 'lease' trademarks, copyrights, logo etc from Google Ireland and pay them for it. The amount paid varies year to year but all of it is legal and money this changes countries legally. This is Google au expense that's tax deductible.
Also, I chose Ireland as an example because it offers tax concessions to industries ( at least it did in 2006 when I was in the valley)
That is highly debatable. Companies and wealthy individuals obtain "legal opinions" from lawyers stating that these schemes are legal, but that is just cover from criminal prosecution.
Any government can declare any of these schemes invalid at will and impose any tax they want. Taxation at this level is a complicated business though. These corporations are larger than most of the world's governments and their owners are permanent not elected.
yeah...they are non-profit right? :)) Let's take Amazon for example, or Google or Facebook...how much do they invest in R&D? Last time I've checked they reported billions in profit every quarter.
As EU citizen I wouldn't mind. If these corps decide its not profitable for them - for sure an alternative will pop. (Currently using two of those services)
I think Booking are safe, as they actually sell access to a physical product. Spotify definitely though (and given that the records labels will take any extra profit they make, this might actually be OK for them).
It's not going to pass though, these things never do, as unanimity is required.
I think taxes based on users or revenue are misguided.
This sort of tax ought to be based on a relative share of megawatts of compute power, and should be progressive in a way that prevents any single entity from controlling more than N% of all computational capacity.
Revenue taxes on businesses that are effectively monopolies in their markets are... not smart. They will raise prices by exactly the amount of the tax and the only ones suffering are their customers who now pay 3% more for everything. I bet it would even be added as line item to every invoice “EU Revenue Tax, 3%”
But how does that work with a company like say Google? What prices are there to raise? It's more like they happened upon an incredible natural resource (the users' eyeballs connected to an unregulated digital network newly built by government funds) and are charging whatever price the market will bear. The tax is just a forced extraction of some of that margin, and I'm not sure how they can compensate for that. If anything, if they really are a monopoly and increasing prices could have got them more revenue presumably they would have done it already.
> If anything, if they really are a monopoly and increasing prices could have got them more revenue presumably they would have done it already.
A company cannot arbitrarily raise prices in isolation without risk of alienating customers. The difference here would be that both Google and its competitors would be subject to the same price hike.
actually that's not the case here, google and its competitors will only be subject to the same price hike if its competitors cross a certain gross revenue threshold, so biasing the market in favor of smaller players.
Isn’t “overseas digital goods and services tax” for overseas companies only ?
Serious question here. On the island I live, we have a tax roughly translatable as « Sea tax » which is added even on locally produced good (sounds stupid? It is...)
Not that you don’t have a point of sorts, but such a simplistic consideration of taxation seems dangerous to me.
There are many theoretical possibilities left unconsidered including some obvious ones, such as fewer EU users of the American services, which is a reasonable goal in many ways, including the interest of the citizens.
Also, not sure where you think tax money goes but, when a government is maintained to some extent by a concerned populace, taxation serves the collective interests of a society.
I don’t have a problem with taxation, nor a problem with revenue taxes which is essentially what a sales tax is. All I’m saying is the targeting here is obviously political and designed to hurt the American companies.
The result will be that the EU receives more tax revenue, but it won’t being coming out of Google and Facebooks’ collective pockets.
That is what will happen as it does with VAT. But it does end up reducing the divide from brick and mortar outlets. Though they will still be cheaper as they avoid the local business rates or local country equivalent, which really add up.
Well even worse, with the 3% revenue tax, european customers would have exactly no benefit.
the streets in europe will stay the same, the governement would still waste money for more staff (see germany for example, and trade it for police and customs).
european would get even more bureaucratic and it will cost even more than the 3% will gain.
* It's done on revenues and not profits. This avoids the impossible question of where profits are realized: if you make money in one country but displace that earning by costs somewhere else, it's practically impossible to determine where the tax should go.
* It's uniform across the EU and so it doesn't incentivize companies to base themselves in any member over another. This avoids the distortion we have now with Ireland's permissive tax system siphoning up all the company headquarters and with it the (scanty) tax revenue.
* Each member receives money based on the number of users they have in their own country, meaning they have a strong incentive to increase usage of digital services and a disincentive to put in place regulatory measures that would decrease adoption and harm growth.
One of the problems of the current situation is that it sets tech companies up as these parasitic monsters that creep into a country, make huge profits, alter the society as they see fit, and give nothing in return. The best thing about this proposal is that it sets up a harmonious relationship: governments get to make money while companies get to have their access to citizens legitimized. With that legitimacy comes better PR and a seat at the table as legal systems everywhere catch up to the world tech companies have created.
Plus it might finally put that ridiculous "tech companies are tax evaders" meme to rest.