In September, the finance ministers of 10 European Union member states signed a letter in which they call for a change in corporate taxation of tech services. The idea: tech giants such as Google or Facebook aren’t paying their fair share. It turns out that unfortunately, both the European Union and certain members of Congress reach this conclusion.
During a Finance Minister meeting in Estonia, the French government presented its concept of taxing turnover instead of profits. As of now, many large online businesses, including the multimedia giant Amazon, have preferred to be domiciled in low-tax EU member states in order to avoid French or Belgian corporate income tax rates.
In administrative court rulings in July, the tech success story Google had escaped a €1 bn bill by the French taxman. The court had ruled that the U.S. company could not be taxed on the activities of its service AdWords, since it has no “permanent establishment” in France.
French Finance Minister Bruno Le Maire has described the measure as “a matter of fairness” and called for European unity on this issue. However, this latest proposal begs the question how sensible of an idea such a digital tax would be, and at which unintended costs the apparent fairness would come. Several EU member states have already raised their concerns facing this issue: Finance Minister Edward Scicluna of Malta has expressed his hopes that “this is not another financial transaction tax,” knowingly that he publicly and vehemently opposed the latter as a Member of the European Parliament.
The Luxembourgish government has taken the position that tax measures of this scale need to be coordinated on a wider range than just the European Union, and that it should be a G20 topic. Danish Finance Minister Kristian Jensen was equally sceptical of the idea, “I’m always sceptical about new taxes and I think that Europe is taxed heavily enough.”
Moreover, the taxing of activities such as advertisement will reveal as increasingly bureaucratic and technically complicated, and also opens the possibility of taxing companies which actually do not make any profits.
As the EU will continue to struggle with an agreement on the issue until December, the U.S. Congress is already on its way to practical implementation. Congress is fully concentrated on the issue of tax reform, with current plans suggesting a dramatic change to the deductibility of advertising costs. This would mean that only half of advertising would be tax deductible in the future.
Once we have a look at the immense value of advertising in the US, we can get a glimpse of the tax impact on the economy. A 2014 study by IHS Global found that the $297 billion spent on advertising in 2014 generated $5.5 trillion in sales (16 percent of the economic activity in the U.S.) and accounted for 20 million jobs (14 percent of U.S. employment). This means that every $1 spent on advertising equals $19 in sales activity and that every $1 million spent on advertising leads to 67 American jobs. Is the U.S. ready to over-tax a branch of the economy which contributes this much?
The situation in Europe is similar: in accordance with numbers by eMarketer, the EU could generate around €800 million through taxing advertisement. Despite being a large sum all together, the great scale of European tax revenues makes it comparable to a drop on a hot stone. It even seems that, (as happened with many taxes in Europe) an immediate scrapping would be necessary soon after its introduction, as the tax costs more in bureaucracy than it generates in revenue. Furthermore, these tax increases are often carried by the consumers and not the companies themselves, which is further increases the burden of low-income earners.
For both the U.S. Congress and the European Union, the concept of “revenue neutrality,” meaning that no matter what changes in the tax code, revenue should remain at the same level, will mean that taxation is likely to increase. However, it is actually small businesses that will be hurt the most by the measure.
Big corporations either reduce their spending on advertising (because their products are known already) or just bear the costs. For small businesses and start-ups however, which heavily rely on name recognition and first customers, these tax proposals can be disastrous.
The tax plans of Republican lawmakers represent an overall improvement; it however stands to reason that neither consumers, small businesses or start-ups should be penalized by the upcoming changes.
This article was first published by Newsmax.
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