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Digital Economy and taxation

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Digital Economy and taxation
Digital Economy and taxation
As the economy has become more globally integrated, multi-national enterprises
(MNE) now represent a large proportion of global growth domestic production (GDP). Digital
economy modifies the approach to society, to economy but also to the tax-system. This
movement is spreading through the whole planet and the answer given by each country is
different.
The Economy is becoming digital. Digitalisation is the process of a general and logical
technology. So, asking a question concerning the relation between Digital Economy and
taxation involves asking if there is a special feature concerning this economic sector
compared to the others. Two key-elements are fundamental. Firstly, there is a potential
important growth with Digital economy. Secondly, Digital Economy is an immaterial
economy and the wealth, coming from it, are personal data and public data, which are
exploited by the firms. All the information that people post on the internet can be a potential
profit no matter whether the information concerns environment, tourism or health. All the data
can be used in order to create new digital activities. Nevertheless, it is important to put the
facts in their context in order to find the adapted taxation system. Indeed, the taxation must
finance public sector, health system but at the same time, it is important to preserve the
potential growth of the economy. It opens up great opportunities for innovation, investment,
and the creation of new e-activities and jobs.
For example, in the United States, in 1998 the Congress voted the Tax Freedom Act,
which forbids all taxation on digital Economy. This system has always been approved by the
Congress. In France, there are a lot of debates in order to create new taxations. Two years ago,
the French parliament tried to create and cancelled at the same time a new taxation. And now,
as always in France, there are always a lot of debates. This question is all the more difficult
because the rules concerning taxation depend on the European Union and each State member.
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In fact, to create an European taxation, the European Union needs the agreement of each
member state. So, this is why the European budget is very small, around 1 % of GDP against
20 % in the USA. Nevertheless, for two or three years, the debate has changed and if we
compare the USA and the European Union, we can observe the same phenomenon.
In fact, on the one hand, the major digital firms pay very few taxes compared to other
firms (I) and, on the other hand, digital economy disturbs traditional economy, so a solution
must be found to conciliate traditional and digital firms (II).
I. The weakness of the taxation with regards to digital firms
The major digital firms (Google, Apple, Facebook, Amazon) use some tax systems
which are aggressive, in order to reduce their taxation. But this phenomenon is not only the
fact of American companies, some European firms do exactly the same but they have a lower
turnover. So the issue applies to American firms.
One problem concerns the fact that we don’t know precisely the scale of money loss
for the States. According to a French parliamentary report published in 2013, Google,
Amazon, Apple and Facebook have a turnover of about 2.2 to 3 billions euros in France, but
paid only 4 millions euros per year concerning firm taxation.
As an illustration, we can observe in this graph the discrepancy between the profits
and the tax paid by Apple. We can notice in yellow the profit of Apple between 2007 until
2011 and in blue the taxation paid in all the world. The illustration highlights that the profit
has increased more than the taxation. But this question concerns all the countries and let’s
consider this in more detail now to understand this international debate.
2
Source : « Quand les firmes du net échappent à l’impôt », (When Net Firms Evade Taxes) C.
Duhhig et D. Kocieniewski, in The New York Times, paru dans Problèmes économiques n°
3062, février 2013.
An international debate
The geographical mobility of products has greatly increased since the cost of storing
and transporting digital products is virtually zero. But the firms have found new systems to
reduce their taxes. In France, the most important tax due by the firms is on the profits. This
tax is due by the firms which have a stable establishment in France.
But digital firms have found a way to reduce their profits. They create another
establishment in a tax haven, such as in Ireland and this second establishment makes the first
one pay for some services, especially in the field of intellectual property rights. So the profits
are paid in Ireland where the level of taxation is low and in France the profits vanish.
Level of taxation on firms in Europe in 2012
 Belgium
17,5
 Bulgaria
7,5
 The Czech Republic
16,8
 Denmark
6,6
 Germany
13,6
 Estonia
13,2
3
 Ireland
08,3
 Greece
9,4
 Spain
15,4
 France
21,6
 Italy
20,1
 Luxembourg
13,8
 Sweden
16,9
 The United Kingdom
9,8
 UE 27
15,1
 Zone euro 18
16,6
Source : OFCE, Évolution de la fiscalité en Europe entre 2000 et 2012, (Fiscality evolution in Europe
between 2000 and 2012) ° 44/25 juillet 2014
To illustrate this point, we can notice in this slide, the different levels of taxation on firms.
There are a lot of differences and as we said in European law, there is no harmonization in the
fiscal system, so the European Union can’t claim that now there is the same level of taxation
in all member states. If the European Union wants to adopt a fiscal legislation it needs
unanimity and the same position of all member states. In other words, this proves that the
European Union needs more integration.
The same phenomenon in the USA
We can observe the same phenomenon in the USA. A memorandum of two American
Senators Carl Levin and John McCain, of May 21st 2013 examined “how Apple transferred
the economic rights to its intellectual property through a cost sharing agreement with its own
offshore affiliates”. Moreover, with the Tax Freedom Act, the digital firms forbid to pay sales
tax, which are due by the customers to the firms which sell a product. Digital firms haven’t
hesitated to shift their activities from one state to another. In 2008, the state of Texas created a
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sales tax and Amazon should collect this tax. At first, Amazon refused and decided to close its
Texas establishment. But other states where Amazon wanted to be, decided at the same time
to oblige Digital firms to collect sales tax. So a compromise was found but with some
advantages for digital firms.
In line with the situation in Texas, digital firms have taken legal action in order to
forbid sales tax on digital activities, created by the states. The decisions of the federal courts
were different, so the Supreme Court got involved in state efforts to force Web retailers such
as Amazon to collect sales tax from customers even in places where the companies do not
have a physical presence. In the latest famous decision of 1992, Quill Corp. v. Heitkamp, the
Supreme Court decided that online retailers don’t have to charge—and collect—sales taxes in
the states where they don’t have a physical business. So it is not a surprise that in October
2013, Supreme judges said that this question doesn’t have to be resolved by the Supreme
Court but by the Congress. In fact, The Marketplace Fairness Act proposed a legislation that
would enable state governments to collect sales taxes and use taxes from remote retailers with
no physical presence in their state.
Difficulties to create new taxation
In France, a lot of proposals have been made to create new taxes. One project
concerned a tax on advertising online. This tax was named « Google Tax ».This proposal was
at first adopted by the French legislature, but the past Government asked the parliament to
cancel it. Google threatened to stop including French sites to its search engine.
The second proposal reveals a characteristic feature of the French Administration. The famous
General Finance Inspection proposed last year to create a new taxation on the data of the
firms which don’t respect the fundamental liberties or the innovation. Such a tax is really
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difficult to create and reveals finally the truth of high level French administration, which is
sometimes disconnected from the economic considerations.
As previously mentioned, the European Union can’t adopt the same level of taxation
for all the countries but there is another difficulty. The European law is supervising the
creation of a new taxation in several matters. For example, the directive of March 7th, 2002
forbids a new taxation on the firms which utilized electronic network. All these considerations
reveal the need to reach a tradeoff between traditional and digital economy.
II. The research of a tradeoff between traditional and digital
economy
Different ways have been suggested to find a solution.
 More international cooperation
As I said in my introduction, Digital economy represents a potential growth, so it is not
such a good solution to tax this economic sector. The best way would be to improve
international cooperation. In fact, the debate concerning taxation of Digital Economy is
spreading in all the countries. So it is not a surprise that the Organisation for Economic
Cooperation and Development (OECD), in a 2013 report named: Action Plan on Base Erosion
and Profit Shifting, explains that all the countries are struggling with the erosion of tax base.
OECD said that there are some solutions if the States are cooperating. But it is easy to state
loud and clear that international cooperation is the solution. Indeed, two elements prove that it
is very difficult for the States to cooperate :
- Firstly, OECD only represents about fifty countries; so a lot of countries are not
concerned by the negociations in the frame of OECD; a better way would be maybe to
negotiate in the frame of WTO.
- Secondly, countries prefer to negotiate with each other.
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Nevertheless, OECD is right when it says that it would be fundamental to create: “indicators
of the scale of economic impact of base erosion and ensure that the tools are available to
monitor and evaluate the effectiveness and economic impact of the erosion base of taxation”1.
 Ireland tax reform
According to what I presented above and the scale of the loss in the fiscal system in
different European member states, Ireland has been put under pressure to modify its fiscal
system. Furthermore, The European Commission opened a formal investigation, which raises
two questions concerning its success :
- On one hand, the Irish fiscal system does not seem to be illegal because there is no
prohibition for a small tax rate;
- but on the other hand, for the European Commission , this Irish system does not seem to
respect anti-trust law. Nevertheless, this would be difficult to prove.
What kind of new legislation will efficiently reconcile digital and traditional economy ?
My argument is not directed against the internet; yet as an example, it is important to
defend bookshops for two reasons: Firstly, bookshops offer more diversity than internet
retailers; The number of bookshops is decreasing in France.
A lot of questions have arisen concerning the compromise between traditional and
digital economy. Recently, nine hundred writers including Stephen King, John Grisham and
Clive Cussler signed a petition against Amazon which is in conflict with Hachette, a French
book retailer. Amazon would like to have the best financial conditions to sell traditional books
and digital books. The New York Times published this petition last summer. Amazon tries to
sell digital books which would allow them to improve their profits. But this would damage the
1
OECD, Action Plan on Base Erosion and Profit Shifting, 2013.
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traditional economy of paper books. Two fiscal examples in Europe would help to understand
the solution at which these countries arrived.
In France, the price of a book is fixed so that it will be sold anywhere in the country at
the same price by all retailers during all year long. The only solution is a decrease of 5 % for
the retailers of the price fixed by the publisher. But, this reduction is insignificant. So French
bookshops asked the parliament some measures in order to defend themselves against
electronic books and their sales on the internet.
On July 8th 2014 in order to protect bookstores, the French parliament adopted a law
regarding book prices on the internet forbidding internet retailers to sell books with free
delivery and a price reduction of 5 %. But on the same day, Amazon announced that the price
of the delivery will be fixed at one cent, which is ridiculous.
In May 2013, Germany adopted a law in order to protect intellectual property of press
editors on the internet. Starting August 1st, they can ask some money from search engines for
the excerpt published in the search engines. But Google tried to find a way to get around this
question by asking press editors if they wanted to be present on its engine search. Should they
want it, they must agree to some free publication. So the law passed in 2013 didn’t reach its
aim.
Bibliography
-
David Streitfeld, « Amazon’s Diminishing Discounts », The New York Times, Bits
blog, 22 Novembre 2012.
-
Doc Searls, “The Intention Economy: When Customers Take Charge,” Harvard
Business Review Press, 2012.
-
Inspection générale des finances, Mission d’expertise sur la fiscalité de l’économie du
numérique, 2013.
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-
OECD, Action Plan on Base Erosion and Profit Shifting, 2013
-
European Commission, expert group on taxation of the digital economy, May 2014
-
Communication on the future of VAT -Towards a simpler, more robust and efficient
VAT system tailored to the Single Market,
http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/key_document
s/communications/com_2011_851_en.pdf.
-
Effective Tax Rates and Tax Policy Considerations (Lisa Evers/Helen
Miller/Christoph Spengel) (2013), ZEW Discussion Paper 13-070, Mannheim,
http://ftp.zew.de/pub/zewdocs/dp/dp13070.pdf
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