The EU focuses on providing fairer and more transparent tax revenue for its member-states by moving away from ‘brick-and-mortar’ taxes towards a value- and revenue-based system.
Traditional businesses tend to pay 20-23% tax to the governments of the countries in which they operate, while tech companies have managed to get that down to just 8-10%. As the pitch of conversation around tech-company taxes rises, the EU has published their communication on a “fair and efficient tax system in the European Union for the Digital Single Market”. The DSM is one of the EU’s highest priorities at present, and the most recent publication focuses on the need to respond to a growing sector which derives revenue from hard-to-value assets like data and automation, as opposed to shopfronts selling physical products.
The changes being proposed by the EU have important implications for both tech companies and the countries in which they operate. With that in mind, here are three main takeaways regarding the EU’s push to change the tax system:
Countries’ corporation taxes could become less relevant in attracting businesses
Corporation tax has long been a prime method for inter-country competition to attract businesses. Ireland, for example, has become the European home for much of Silicon Valley’s Finest with a low corporation tax rate of just 12.5%. The UK was swift to start talking up a cut in corporation tax from 20% to below 15% following Brexit, and the CEE region has rates ranging from 10% to 20%.
The change of tax rates towards a system which charges on the revenue derived from a given country would level the playing field, at once making the tax system far more difficult to avoid and removing a method of inter-country competition. Such a move could bode ill for developing nations, such as those in CEE, and their ability to compete for business. On the other hand, it could create the potential for those governments to earn more in tax revenue from companies operating under their jurisdictions — revenue which could be fruitfully invested into further tech-sector growth.
Attempting to remove competition from the equation, however, may not be entirely possible following the UK’s exit from the EU; London is already the established global home of the fintech sector and may then be able to issue deal-sweeteners hindering the ability for Lithuania, for example, to play catch up.
The EU has demonstrated repeated impatience towards tech giants
Opposition to the new tax proposals from tech companies is unsurprising given their heavy anti-regulation stance despite their liberal social positions. Having said that, Bloomberg and Ireland seem to currently be leading the counter-force to the proposals. The EU has made a habit of slapping huge fines on tech companies, to the extent that it’s almost becoming a rite of passage; Amazon has been hit with fines and the EU admitted the fine it imposed on Apple was a political move, although France lost its battle to fine Google.
The new proposals do, however, contribute to a flurry of legislation imposed on the tech industry, of which the GDPR‘s implementation has been at the forefront. In addition, plans are afoot to change copyright laws and the EU has threatened tech companies with the implementation of anti-online hate speech legislation if the Tech Against Terrorism endeavours don’t yield speedy results.
Regulation has the potential to create a safer financial system
Whilst increased regulation might have very different impacts on developed economic regions like north-western Europe compared to developing regions like CEE, it might also be viewed as shrewd prudence by those seeking to learn lessons from the 2007-08 financial collapse. The failure of the financial system a decade ago has been, in part, explained by the imbalance caused by varying global tax structures. A few short years after the collapse, Gordon Brown, UK Chancellor in the run-up to the crisis and Prime Minister during, vocalised his regret in failing to strive for a safer financial system without having institutions leave for countries with less onerous legislation.
Concerns about a “race to the bottom” are already the cause of reviews of UK competition laws post-Brexit. So whether the barrage of legislation aimed at the tech sector in Europe might have varied effects on different economic regions, it could also prevent repeated mistakes from allowing competition to drive instability — though this time, through the European tech sector.