Click and bail: Can Macron stop digital multinationals from dodging tax?

Written by Laura Seelkopf on . Posted in Current opinions, Opinions

In his Sorbonne speech on the future of Europe in late September, Emmanuel Macron called for a new tax on the revenue of digital multinational companies such as Facebook, Amazon and Netflix. The French president wants to force major digital companies to pay taxes in the EU country where their services are used, rather than where they are headquartered, and to crack down on those companies which avoid paying at all.

It is not an entirely new idea, and in several places it follows on from some of his predecessors’ thinking on corporate taxation in Europe. In 2015, while serving as Francois Hollande’s economy minister, Macron, together with his German counterpart Sigmar Gabriel, called for a harmonised corporate tax, part of which would go to a common Eurozone-budget as part of their ambitious plan for a more integrated Eurozone.

This is reflected in the European Commission’s plan for a Common Consolidated Corporate Tax Base (CCCTB), which proposes a unified corporate tax system, mandatory for all big multinational companies doing business in the EU. Why, then, does Macron single out digital companies?

Seelkopf

Laura Seelkopf is a Jean Monnet fellow at the Schuman Centre.

With Europe seemingly on the way to creating a digital single market, figuring out how to tax and regulate multinational companies that deal in the EU yet are based in only one member state or completely outside is becoming increasingly urgent. The number, size and profits of major digital companies like Facebook is accelerating at a rapid rate. Yet, simultaneously, their effective tax rates are less than half that of traditional multinationals.

Due to the nature of their product, digital brands can set up shop in low-tax environments, and exploit existing tax-planning tools that were regulated without the digital economy in mind. Paris has found this practice particularly vexing, and earlier this year tried to tax Google for selling ads to French clients. In July, the French courts ruled in favour of Alphabet (Google’s parent company), reasoning that its service was provided by Google’s subsidiary in Ireland, so taxes were lawfully due there.

Macron‘s proposal represents one possible way to tax digital companies where they provide their services. From a Commission perspective, it is a small step on the road to creating a harmonised European corporate tax system. But how feasible is a specific tax on digital companies in practice?

Levying an additional tax on untaxed online transactions would certainly seem more urgent, in the sense that digital companies currently pay much less in taxes than their more traditional counterparts – a fact currently very much in the public eye after the Commission’s legal action against Irish tax aid for Apple. Yet such an endeavour faces a number of challenges – from within and without of the EU.

European tax policy decisions require the unanimous support of all member states, which is easier said than done. There is clear, internal division within the EU when it comes to tax. Those who stand to lose from intra-EU tax competition, like Germany and France, need to pay off those who will suffer from tax harmonisation – namely, smaller states like Ireland and Estonia, which are not only winners of general tax competition, but also home to major digital centres.

It might be easier to implement a general system of harmonised corporate taxation, which allows for more concessions to the losers. Yet even if smaller states agree to such a tax, the result of the recent German election has thrown up a political stumbling block. The likely presence of the pro-business Free Democrats in Chancellor Angela Merkel’s next coalition could threaten Franco-German cooperation on tax reform.

On the external front, the OECD will put forward recommendations on taxing digital multinationals at a meeting of G20 finance ministers next Spring. Macron has clearly signalled the Commission’s position to the international community and, even if the EU is not able to reconcile its internal differences before the meeting, Brussels’ political clout is likely large enough to influence the OECD’s proposal and set the international agenda.

However, here too, Macron’s focus on digital companies might make cooperation harder. It is a sector dominated by the United States, and neither President Donald Trump’s tax plans nor his unavowed protectionism will make it easier for other countries to tax digital services provided by companies based in the US.

Nonetheless, if we look at individual tax evasion and the Foreign Account Tax Compliance Act (FATCA), the US case illustrates how a global economic power can unilaterally push for international tax cooperation, while concurrently allowing tax competition within its borders. In the end, Macron’s plan to tax digital multinationals might enjoy more initial success on the international stage than the European one.

Laura Seelkopf is a Jean-Monnet Fellow at the Robert Schuman Centre for Advanced Studies at the EUI, currently on leave from the Research Center on Inequality and Social Policy at the University of Bremen. Her current research focuses on the comparative political economy of taxation.

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