The Digital Tax: Where do we Stand?
Updated: Jul 19, 2020
During the NATO summit earlier this week, France announced that it would be imposing a new 3% digital tax on technology companies which generate revenues in France, but do not pay taxes in France. This issue has been brewing for some time. Apparently, the OECD and many countries are looking at the issue of taxing tech companies now, including the US. Of course, what would help in the first place would be for countries to come to an agreement as to how revenues generated in countries where they have no physical presence should be taxed. And when agreed, then these tax policies should be applied universally by all countries and across all multinational companies. The choices seem rather straight-forward to me – either apply corporate income taxes i) in the company’s home country, or ii) in the country where the revenues are generated. I personally think it is fair to tax revenues in the country where the revenues are generated, because I suspect that is the way it works for any company selling products or services in a traditional sense, i.e. via “bricks and mortar”. For example, although I did not research this, I suspect that McDonald’s or LVHM pay corporate taxes in the many countries in where their products are being sold, which should (ideally) be offset against taxes in their home country (so that there is no double taxation). So why not do the same for tech companies and drop the “physical presence” text? (As an aside, the tech companies themselves aren’t jumping up and down over a digital tax, mainly because I suspect they will simply pass the tax to the consumers / users.)
Of course, #POTUS has come out emphatically against the decision by France to apply a digital tax, I suspect not because it is wrong in his view, but rather because he seems to think the US-based tech giants aren’t paying their fair share of taxes in the U.S. either, and he’d rather that the US grab any incremental corporate tax revenues (as opposed to this revenue “leaking” to a foreign country). But are the US tech giants really underpaying? I did a quick check (data below), and see that the FAANG’s pay on average an effective (global) tax rate of 20.1%, against a new US top corporate tax rate of 21%, an EU-average corporate tax rate of 21.7%, a French corporate tax rate of 34.4% and a global corporate tax rate (208 countries) of 23% (source: The Tax Foundation). Having said this though, it does appear that Amazon, Google, Apple and Microsoft are all paying less than the US corporate average. It is hard to say without much more research whether this is because of clever tax planning or because these companies are not paying taxes in foreign countries where they have no physical presence. I imagine that it is some combination.
I also looked at four other US multinational companies and a few non-US multinational companies, and it appears that more established European conglomerates are paying higher effective tax rates than US multinationals, but not always. And effective tax rates of the four US non-tech companies vary wildly. Of course, this is a limited subset of data and it is dangerous to draw across-the-board conclusions because companies can have unique tax circumstances, but I feel reasonably comfortable is saying that the FAANGs look to be getting a “sweatheart” deal somehow, aside from Facebook and Netflix. It would be interesting to know how Coca-Cola and Ford are paying less than the corporate average. And I can also see why Amazon is “low hanging fruit” with an effective tax rate of only 14.4%.