EU set to make tax reform push on digital firms

BRUSSELS -- The European Union's offensive against Silicon Valley looks as if it is likely to resume, as officials in Brussels consider a raft of proposals aimed at increasing the amount of tax paid by digital titans like Facebook and Amazon.

The new proposals -- a copy of which was reviewed by The New York Times -- broadly aim to tax internet companies in the countries where they generate their business, rather than allow them to shift profits to jurisdictions with lower rates.

But the plans will give ammunition to critics who argue the European Union unfairly targets the U.S. technology sector. Though the bloc's leaders deny that they single out American firms, opponents point to an array of investigations against household names for suspected violations ranging from how they handle user data to antitrust complaints.

But it was not clear whether the latest effort by the European Commission, the EU's executive arm, would gain sufficient traction. Any such reform would require the unanimous approval of the bloc's 28 member states. While several major countries like France have pushed for a crackdown, others do not want to change a system in which some of them can attract corporations with tax incentives and other inducements.

In seeking to tax revenue rather than profit -- one of the options being considered -- European regulators want to ensure that major internet companies pay taxes to national treasuries where they do business. For example, Amazon, a target of the commission in the past, operates across the European Union, but lists its regional headquarters as Luxembourg, a tiny country with a population of around 500,000, and so can take advantage of its low taxes.

"The main challenge is to reform the international tax framework, which was first designed at the start of the 20th century and is no longer fit for purpose," the report said.

The existing system "has worked well for traditional 'brick and mortar' companies but as business activities have become more globalized and digitalized the old rules work less well," it continued.

It found that companies that did their business online were paying an effective tax rate of 8.5 percent, or less than half that paid by more traditional businesses.

The European Union stepped up its efforts to curb tax avoidance, by companies as well as wealthy individuals, after the financial crisis, which forced many of its member states to adopt belt-tightening measures, slashing public services and raising taxes.

But because big corporations were able to shift their profits to low-tax countries, critics of the austerity programs argued that the brunt of the cuts affected small businesses and individual citizens. In the years since, calls have increased for large companies to be more transparent and pay more tax.

U.S. tech companies, particularly, have found themselves the targets of the commission's ire. Commission officials are investigating Google and Qualcomm for allegedly abusing their dominant market position. Officials in Brussels are looking into Amazon's tax practices in Europe. And the commission has demanded that Ireland recover about $14.5 billion in back taxes from Apple.

The commission said in its latest proposals that it wants to agree to a long-term solution with other countries around the world. But that could take a long time to negotiate, and may not close enough loopholes, so it put forward several shorter-term plans that could wind up meaning companies like Amazon, Facebook and Netflix pay larger tax bills in Europe much sooner.

"In the absence of adequate global progress, EU solutions should be advanced," the commission said, adding that it could make more formal proposals on taxation in the coming months.

The potential reforms it outlined include taxing companies based on their revenue rather than their profits, allowing national authorities to tax payments made by consumers to digital businesses, and allowing individual countries to tax revenue generated from advertising by internet companies.

France has thrown its weight behind the first of those reforms, in particular. But questions have been raised over whether taxing revenue is a viable plan. Businesses that turn a hefty profit could effectively pay the same as a company of a similar size that has narrower margins, or even loses money.

"The fundamental question is where is the business really being conducted," said J. Scott Marcus, an analyst at Bruegel, a research organization in Brussels. "The devil is in the details with a digital service across borders -- the service can be made anywhere."

"The question is who gets the tax," he continued. "It's a genuine challenge."

SundayMonday Business on 09/25/2017

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