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IT IS a choice that would make Thomas Hobson proud. European officials this week unveiled plans for a quick and dirty tax policy to apply to big digital firms, in theory by the end of the year. The idea, promised since September, would ditch a tradition of taxing profits and instead let collectors in member states take a share, 3% for starters, of the firms’ local revenues. There is a lively debate about where exactly the tech giants create taxable value. Is it where their programmers sit? Or the intellectual property? Or users? The firms have become so adept at tax avoidance that the European Commission is not going to hang around until the argument is settled.
Pierre Moscovici, the commissioner overseeing the proposals, was at pains to say on March 21st that the turnover tax would be an “interim” fix. He denied Americans are his targets. Between 120 and 150 companies would be affected, around half of them American and a third European. (Apple, Google and other American giants would surely get the biggest bills.) Only those with global revenues of more than €750m ($920m), and EU revenues of more than €50m, would be covered. Earnings in the sights include those from ads and marketplaces.
Crucially, firms would pay taxes where they generate revenues, which are harder to sequester abroad with the sorts of intragroup loans and other accounting wheezes often used to book profits in lower-tax jurisdictions such as Ireland or Luxembourg. Regulators say that this practice helps explain why digital firms pay an estimated effective tax rate in Europe of just 9.5%, compared with 23.3% for bricks-and-mortar ones. The new tax could raise €5bn a year.
France under President Emmanuel Macron has pushed hardest for the plan. But it hardly signals “the right environment for modern business” that Mr Moscovici brags about. Tax on revenues could backfire—it is unclear what a loss-making firm with whopping turnover is supposed to do, for example. Nor will the proposal easily become reality: tax changes in the EU require unanimity. France, Britain, Germany, Italy and Spain welcomed the plans. But they will have to strong-arm smaller, low-tax countries, which have most to lose. America, unsurprisingly, is also opposed. Steve Mnuchin, its treasury secretary, told the New York Times this week that gross taxes on internet companies are “not fair”.
Why push a reform that might hobble the sort of digital economy European officials call the future? Enter Hobson: doing so makes another proposal, announced by Mr Moscovici on the same day, look more appealing. His preferred outcome is for firms to pay taxes locally on a share of their digital profits, not revenues. To make that possible he says countries should pass laws to identify companies’ “digital presence”. This would be defined as having online revenues worth €7m or more, 100,000 customers or more than 3,000 business contracts in any given country. The EU is fuzzier on how to determine what share of profits derives from these revenues.
That may be fleshed out by various obscurely named efforts to draw up global standards for taxing profits. The EU has an existing proposal, called CCCTB (don’t ask), for common rules for calculating firms’ taxable profits across Europe. However, such plans progress agonisingly slowly, perhaps because digital firms (and their army of lobbyists) prefer the lucrative status quo. The real gain from threatening a turnover tax might therefore be to speed up plans to tax profits better.