Digital taxes are not the answer to the taxation of companies like Google

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According to the FT:

France and Germany have abandoned EU plans to impose a wide-ranging digital tax on tech companies, in favour of a narrow levy on advertising sales that would be likely to exclude giants like Amazon and Apple.

In an attempt to rescue reform of taxation rules for digital companies, Paris and Berlin will on Tuesday present a draft plan to impose a 3 per cent tax on revenues generated by ad sales in the digital economy, according to a draft seen by the Financial Times.

I have already quoted from a submission I will be making with Professor Andrew Baker of Sheffield University to the IMF later this week. In there we do, at the invitation of the IMF, consider digital taxation and say:

The inability of the existing corporation tax system to reflect the economic substance of the activities (and accounting) of a modern corporation has already been noted. This is particularly true with regard to digital companies, where the ability to exploit the current international tax architecture to avoid corporate income tax has become extreme, and a core part of the business model of the monopolistic entities that now tend to dominate segments of this market.

In the face of the apparent inability of that international tax architecture to respond to the stresses that these tax spillovers have created local solutions are being sought, most of which are based on taxing turnover in some way, even if turnover is not, per se, an indicator of the capacity of the corporation to pay tax.

This move is unlikely to impact the corporation itself given that the incidence of the charge is likely to fall onto those paying for the corporation’s services given the monopolistic, or at least oligopolistic, nature or the price setting activities of these entities.

The consequences of the failure to adapt the corporation tax system to need and its fracturing as a result has significant spillover effects. In particular, calls for the abolition of corporation tax itself might arise, which would remove its quality as a mechanism for reducing spillovers in the first instance.

Second, the corporate tax base will be shifted towards consumers through the imposition of what is, in effect, a new sales tax which will impact consumers and not the corporate entities charged with collecting it.

Third, this will increase, and not decrease spillover effects. In particular the tax system may well become more regressive. It will also be more heavily biased in favour of large corporations and against smaller ones, who consume the services if the major digital companies.

Finally, the system will be more fragmented rather than less, and this always increases opportunities for abuse.

The need is for a unitary apportionment formula model for tech companies where usage rather than sales becomes the variable for profit apportionment related to revenue. Alternatively, minimum corporation tax systems should instead be adopted by countries when seeking additional revenue from these corporations since the spillover risks are much lower.

The unitary apportionment model is explained in this post.

The fact is that digital tax is only necessary because the tax system is based on a legal fiction that multinational corporations do not exist. They do. And they need to be taxed as such. It's time countries - all countries where there is significant economic substance at least - recognised the fact.