The Tech Tax: Compensation for Your Data?

Our economy is rapidly becoming digital and is increasingly dominated by tech companies.

France is leading the way in Europe with a new tax to make it more difficult for tech companies to profit from peoples’ data without paying the tax that is due on it.

Could this be the way forward, or could the negative message it sends to the international tech community and smaller operators in the same industry be a bigger price to pay? 

The GAFA tax: a tax for the 21st century

The Organisation for Economic Co-operation and Development is attempting to standardise tax rules across the worlds 34 richest nations such as the UK, the US, France and South Korea, and has called for a global solution on the best way to tax multinational enterprises in a rapidly digitalising economy. 

In a recent speech in Washington, managing director of the International Monetary Fund, Christine Lagarde, said that governments must react to growing concerns that tech companies are not paying enough tax in the countries where they operate, denying national treasuries crucial funds for public services and welfare.

 Large tech companies such as Google, Amazon, Facebook and Apple- nicknamed GAFA companies in France- tend to pay relatively small amounts of tax thanks to legal loopholes and business models that exist worldwide. Under EU law these internet giants can choose to report their income in any Member State, prompting them to opt for low-tax nations like Ireland, the Netherlands and Luxembourg.

In Ireland for example, the tax-to-GDP ratio has decreased from 30.8% in 2000 to 22.8% in 2017. While it does impose corporation tax, the income it gets from this is relatively low compared to the number of wealthy companies in Dublin and Cork. The European Court of Justice recently ruled that Ireland had allowed Apple to avoid €13 billion worth of tax and ordered it to clampdown on this.

The European Commission proposed a 3% tax on big internet companies last year, but it has not yet been able to come to a unanimous decision with protests from low tax countries like Ireland, Sweden and Denmark. Frustrated at the lack of action from the European Union, some governments are now taking matters into their own hands.

The French Economy Minister Bruno Le Maire has proposed a bill to tax these large tech companies, dubbed the GAFA Tax.  The draft bill promises to impose a 3% revenue tax on digital companies which depend on their users for the value they create with revenues above €750 million globally, and above €25 million nationally in France. It will apply from the start of this year and be due in October and is estimated to raise about €500 million this year alone in tax. While it applies only in France for now, Le Maire has undertaken to campaign to develop the tax internationally. 

These proposals are essentially trying to compensate you for your data! These tech companies make massive amounts of profit with their targeted advertising and data exploitation, and tax levy is to make these companies pay their fair share back into welfare and public funding in the states where they operate.

 A growing momentum 

France is not the only European country to be seen acting. Unilateral action has also been seen in Austria where a 3% tax has been proposed for advertising revenue of technology companies. Spain and Italy are also proposing a 3% tax on digital revenue.   

Last October in the UK, Chancellor Phillip Hammond announced plans for a 2% revenue tax on the profits of search engines, social media platforms and profitable online market places. The United Kingdom, also growing impatient with the lack of EU action, estimates that this would raise £400 million a year.

To spur on movement the European Commission has suggested it will adopt majority voting for its proposed tax rules.

 Would it be effective?

There are concerns that the new French GAFA tax, created ahead of agreement by its EU counterparts, could result in a new law which is not compatible with the EU principles of freedom of establishment and EU competition. 

Some are also worried that it could damage France’s prospering tech industry. Tech investors will naturally pursue lively reliable economic areas which have a variety of small to large tech companies thriving in it. Creating constraints for these tech companies could dissuade them from pursuing business in France and have a detrimental effect on the economy’s reputation.

French officials predict that their new digital services tax could generate an income of €500 million, but perhaps this would be a large price to pay for the message France will be sending to the international tech community.

The UK’s biggest trade authority Tech Nation has also raised concerns about the proposed tax in the UK. It worries that the tax would “stifle entrepreneurialism and innovation, which recent governments have done much to encourage.”

What will large tech companies do?

Perhaps big tech companies like Google will try to fight these sorts of taxes legally. We know that Google is no stranger to taking its disputes to Court - and it is good at winning

Perhaps, however, GAFA companies will play the waiting game. It might make more sense for these companies to quietly lobby for a harmonised EU approach that would offer more stability to investors and more relaxed tax schemes for them. Tax changes are coming whether they like it or not, so perhaps they need to choose the lesser of two evils.

Article by Lily Morrison, Legal Consultant @ Gerrish Legal

March 2019