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Europe Turns on Facebook, Google for Digital Tax Revamp

Today in most EU nations the US tech titans exist almost exclusively in the virtual world, their services piped through apps to smart phones and tablets from designers and data servers oceans away
The OECD believes that tax evasions cost governments around the world as much as $240 billion a year in lost revenue.
The OECD believes that tax evasions cost governments around the world as much as $240 billion a year in lost revenue.

They have revolutionized the way people live, but are US tech giants the new robber barons of the 21st century, banking billions in profit while short-changing the public by paying only a pittance in tax?

With public coffers still strained years after the worst of the debt crisis, EU leaders have agreed to tackle the question, spurred on by French President Emmanuel Macron who has slammed the likes of Google, Facebook and Apple as the "freeloaders of the modern world", AFP reported.

As recently as March, five of the world's top 10 valued companies were Silicon Valley behemoths: Apple, Google's Alphabet, Microsoft, Amazon and Facebook. (Germany's SAP was Europe's biggest and 56th on the global list).

But tax rules today are designed for yesterday's economy when US multinationals—such as General Motors, IBM or McDonald's—entered countries loudly, with new factories, jobs and more taxes for the taking.

These firms had what tax specialists call "permanent establishment", when companies showed a clear physical presence measured and taxed through tangible, real world assets.

But today in most EU nations, the US tech titans exist almost exclusively in the virtual world, their services piped through apps to smart phones and tablets from designers and data servers oceans away.

Ghost-like, Silicon Valley has turned Europe's economies upside down, but often with just a skeleton staff and some office space in markets with millions of users or customers.

According to EU law, to operate across Europe, multinationals have almost total liberty to choose a home country of their choosing. Not surprisingly, they choose small, low tax nations such as Ireland, the Netherlands or Luxembourg.

Gaining From Low Tax Platform

Thus, it is through Ireland that Facebook draws its wealth from millions of accounts across Europe. There are 33 million accounts in France and 31 million in Germany, according to recent data. While users enjoy the platform, Facebook tracks likes, comments and page views and sells the data to companies who then target consumers.

But unlike the economy of old, Facebook sells its data to French companies not from France but from a great, nation-less elsewhere, with no phone number, address or physical "presence" for a customer who probably cares little.

It is in states like Ireland, whose official tax rate of 12.5% is the lowest in Europe, that the giants have parked their EU headquarters and book profits from revenues made across the bloc.

Indeed, actual revenues from advertising are minimal in France and Germany, but at Facebook HQ Ireland they grew to €7.9 billion ($9.32 billion), even though the vast majority does not come from the tiny EU island-nation of a mere 2.5 million users.

Google follows the same pattern: in Germany in 2015, it had a little over 71 million users, in France just over 55 million. But in both nations, revenues are minimal.

Yet, in Ireland, where the number of search engine users is less than five million, revenues for Google-parent Alphabet reached €22.6 billion in 2015.

According to an analysis by Paul Tang, a specialist on tax issues at the European Parliament, France lost €741 million in tax revenue and Germany €889 million between 2013 and 2015 due to so-called "tax planning" by Google and Facebook.

No Transparency

The Organization for Economic Cooperation and Development believes that such tax schemes cost governments around the world as much as $240 billion a year in lost revenue, according to a 2015 estimate. "The actual activity of each company, including US tech giants, is not known," said Manon Aubry, spokeswoman for the NGO Oxfam.

"Beyond the number of accounts or users in each country, it would be necessary to know in the case of Google for example, the amount of advertising sales in each country. We do not have it."

"One of the first issues, therefore, is that of transparency: to rule that large companies publish data on activities and taxes paid in all the countries where they are present."

To the European Commission, the digital shortfall on tax is clear. The effective tax rate on the profit of digital giants in the EU averages only 9%, while that of traditional companies exceeds 20%, it said.

Apple, also based in Ireland, became one of the EU's most emblematic tax cases when Competition Commissioner Margarethe Vestager ordered the iconic iPhone maker to pay €13 billion in back-taxes.

Brussels says Dublin's red carpet treatment accorded Apple an effective corporate tax rate of 1% on its European profits in 2003—a rate that decreased to a scant 0.005% in 2014—just a fraction of the official rate.  Dublin is cheaper and boasts low corporate tax rates. Its "Silicon Docks" neighborhood houses tech giants Google, Facebook, LinkedIn, and Zynga.

France says this proposal, presented by French Finance Minister Bruno Le Maire in September, has received the support of some 20 countries, including Germany, Italy and Spain.

But there is fierce opposition from states like Cyprus, Malta, Ireland or Luxembourg—countries that have linked their EU membership to low corporate tax and thus transformed their economies from rural backwaters to financial hubs in a globalized world.

Member states now agree that the problem would be best addressed at the international level, in the G20 or by the OECD, in order to prevent a high-tech exodus from the EU.

 

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