Last week I suggested that the wrong way to tax tech companies was on their revenues, as the UK Treasury seems to now be suggesting. Instead I suggested what I call an alternative minimum corporation tax, which is, in effect, a single state anti-avoidance measure that taxes a tech multinational on the likely apportioned part of its profits that arise in the country that is aggrieved by being paid too little tax is, as is the case for the UK in the case of the tech giants.
The FT has now published a leader comment on this issue. As it says the issue is significant:
Such companies displace older businesses – pay television, store-based retail – that have a harder time deploying wheezes such as sending fees to the entities, parked in tax havens, that hold server computers or intellectual property. So the UK does not just lose tax revenue; it is forced into the position of subsidising one form of economic activity (the software-based one) over others. No government should tolerate this.
I agree. There is a reason for intervening: markets are being distorted.
But the FT agrees that revenue is the wrong basis for an alternative tax:
The challenge with a revenue tax is seeing that it hits only its intended target. It may be fine to hit eBay, Netflix, Facebook or Amazon on the basis of local sales. But then what happens to early-stage, unprofitable tech start-ups? They pay no corporate tax now, and that is exactly as it should be.
Which is why I argued for a tax on profits alone, and so does the FT. As they say:
A better solution will be less elegant and take longer to reach, but would distribute the burden of taxation more fairly. It would involve coming to a consensus about where and when tech platforms create value. The current regime, by default, holds that most of the value is created by the intellectual property or at the nominal location of an electronic transaction, and that little or none is created where the service is delivered. A more balanced formula is needed.
Again, I agree. That is why a formula based on people (who create the tech, after all) and sales (which gives the tech its value) is required. That's what I offered. By implication the FT agree a formula is required: it is.
I suggest an answer based on unitary taxation is the solution. I suggest an alternative minimum corporation tax is an intermediate step to that solution that deals with all the issues the FT raises.
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There are a few MMT’ers who (controversially?) believe there should be no tax on corporate profits.
As far as I can see, the main argument is that it puts up prices to consumers, and they believe there are better ways to tax.
Presumably their argument on the pricing of goods would apply even more so to turnover tax.
There are also some who are indifferent to tax havens
I don’t get their logic
And on corporation tax they are just wrong…the evidence does not support their argument
If a formula is applied, it brings back the question of value creation in ads business I asked about a few days ago.
Let’s leave out the question of ads being paid for in the USA shown to European users for now. Still what remains to be decided is how we define “by destination” for ads.
If a large car producer from Germany buys ads from Google and FB, to be shown to users in many EU countries, should the revenues(or profit) be split only according to “views” or should Germany get an additional part of the taxes because the a German company paid for the ads?
This is a ‘non-question’ as I have pointed out
VW does not send out random ads
It targets markets
So does Google – and the algorithm makes that clear
And clicks are in a place traceable by Cookie
This really is not rocket science and it can be legislated
You are just offering excuses
I think it’s a legitimate question whether or not the country where the company that pays for the ads is established, should get an extra attribution of the profit or not.
If not “sales by definition” need to defined differently for ads business, which seems to be what EU commission wants to do.
Stay at it Richard. You are right. Unitary Tax is the solution and the nay-sayers either
– have a vested interest,
– don’t like tax at all so believe that it is right that they should be infinitely avoidable or
– don’t understand how large, integrated, multi-national groups function.
My only comments for the short term are that:
1. Getting the apportionment formula right will be very complex and take time. What should or should not be included as an employee? Do workers working for an independent (LOL) contact manufacturer or limited-risk distributor count? Do sales take place where goods are delivered, contracts concluded or can some destination principle be worked out? How will some of the poorest counties that are the source of some of the most valuable minerals that go into high-tech products get a piece of the action? Etc.
2. Pending resolution of the above, a blunt-sword AMT is the right way for now but it must be temporary.
3. Most double tax treaties will make it very difficult to apply Unitary Tax. The AMT should therefore be introduced not as a tax but as a (non-refundable?) payment on account of tax. If it’s not a tax then the DTT does not apply.
I’d like to say issues like outsourcing can be covered
Candidly I doubt they can
The reality is any formula has to be simple
I acknowledge a general anti-avoidance principle will still be needed