Tech Giant Tax Problems ‘Do Not Exist,’ Brussels Group Says

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By Joe Kirwin

The perception that internet companies pay less corporate taxes is a myth and the idea they have fostered profit shifting is inaccurate, according to a Brussels-based think tank.

Based on research carried out in the Asia-Pacific region, the European Centre for International Political Economy report concludes that “draconian” methods under consideration in the European Union as well as some Asian countries to impose a turnover tax on companies such as Facebook Inc., Google Inc. and Amazon.com Inc., are solutions to “tax problems” that do not exist.

“Blaming the internet for tax erosion is a misconception created for national politics or protecting old telecom incumbents,” said the report, which was co-authored by ECIPE director Hosuk Lee-Makiyama, a Swedish national and former European Commission official.

The argument runs counter to the position of many European Union member nations, which are negotiating plans to tax internet giants.

The European Commission did not respond to a request for a comment.

Setting Tax Strategy

The report, released Jan. 17, comes as the European Commission finalizes a proposal on digital taxation due in the last week of March. The proposal is expected to call for a turnover tax on large internet companies to ensure they pay their fair share of tax in the EU country in which they do business. France, Germany, Italy, Spain and six other countries signed a letter calling for the commission to propose a turnover tax on internet companies in September.

“If all countries started taxing foreign exporters as though they were local businesses every Asian export-led economy or any country with a trade surplus would be at a net loss—with the United States as a net gainer,” the report said. The EU statistical agency Eurostat reported Jan. 15 that Germany had a 230.9 billion euro trade surplus from January to November of 2017, which is nearly fives times that of any other EU country.

The report also comes as the OECD draws up a report taxing the digital economy, which is one of the base erosion and profit shifting reforms that has yet to be agreed upon. The European Commission’s March proposal is supposed to be a temporary solution until the OECD finalizes its work.

Worldwide Problem

Dmitri Jegorov, the under-secretary for taxation in Estonia, told Bloomberg Tax the report confirms there is a worldwide problem involving tech companies and taxation. Jegorov led the digital taxation discussions in the Council of Ministers during the recently concluded Estonian EU presidency.

“There is a deep mismatch between companies’ significant economic presence and the jurisdictions where they pay taxes,” Jegorov said in a Jan. 18 email. “Raising it on an international level and continuing our discussions at the OECD level, which so far has been the best forum for such discussions, is absolutely necessary.”

Tommaso Faccio, a lecturer on taxation at the University of Nottingham, a member of the OECD BEPS monitoring group and the head of the Independent Commission for the Reform of International Corporate Taxation, told Bloomberg Tax the ECIPC report conclusions are flawed.

“The authors seem to be unaware that big digital companies have transferred the ownership of intellectual property to low tax jurisdictions either outright or via licensing arrangements so that all of the profits or the majority of them associated in non-U.S. sales end up in tax havens,” Faccio said in a Jan. 19 email.

Profit Shifting

Faccio said it is this profit shifting that makes necessary a turnover tax like the one being considered by the EU and the OECD.

“If companies want to avoid paying these turnover-based taxes they can simply book the sales in a local company like any other business,” Faccio said.

To contact the reporter on this story: Joe Kirwin in Brussels at correspondents@bloomberglaw.comTo contact the editor on this story: Penny Sukhraj at psukhraj@bloombergtax.com

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