INTERNET COMPANIES PAY MORE TAX THAN THE EUROPEAN AVERAGE

Sit down before you read this: Internet companies pay more corporation tax than the European average, in some cases many times more.

According to the European Commission the average ‘effective’ corporate tax rate in the European Union and EFTA is 12.9%; in 2012 Amazon had a whopping 78% in corporation tax on its global profits. In that same year Yahoo had 37% and Google 19.4%.

It is important to note that corporation tax is paid on profits and not on revenues. In 2012 for example, the Commission says Amazon had global revenues of USD 61 billion, but profits of only USD 544 million. The difference comes from being a low margin business and from investments. If you don’t make much profit, you don’t pay much tax.

The Lux Leaks files list 340 companies who have received ‘comfort letters’ from the Luxembourg tax authorities. Of these, 32 are categorised as ‘Tech’, meaning more than 90% are not tech. Other sectors include: energy, finance, food, health, manufacturing, media, retail and travel. There is also a broad geographical spread with prominent European names including Ikea, Burberry, Vodafone, Volkswagen, GlaxoSmithKline and the Guardian Media Group.

The files have one clear message: companies from all sectors and all regions of the world have been using tax optimisation techniques.

A review of the tax incentives for the knowledge economy will need to address the whole knowledge economy and not just the digital sector. This is the conclusion the European Commission has arrived at.

Also of note is the fact that receipts from corporation tax have grown over the last 30 years. According to Massimiliano Trovato of the Istituto Bruno Leoni corporation tax has grown as a percentage of total tax take from just over 2% to around 3%, dipping for 3 years after the financial crisis, but rising again for the last 3 years.

So what does this mean for policy makers looking at how to reform the tax system? The reason we are having this debate is that in a global economy where companies sell and where they produce is constantly evolving. International companies often pay the bulk of their corporation tax in their home, or producing jurisdiction, and much less in countries where they sell. The tax system is having trouble keeping up.

Companies pay most of their corporation tax in the countries where they produce ‘value’, not where they sell. Let’s take a company like Louis Vuitton as an example. The majority of its profit comes from its intellectual property (i.e. its brand and design know-how). Is it therefore likely that a change to the system of where you pay tax would result in Louis Vuitton paying more tax in China where it sells huge amounts of handbags and cognac? Such a change would have an impact on French corporation tax receipts.

Know-how in various forms has long been the target of government tax incentives in order to attract or retain companies. This is true in the film industry, where the UK Treasury Minister has been explicit about his role in attracting the production of the latest Star Wars film to the UK using tax incentives, through to R&D in industries such as pharmaceutical or IT.

The change in the political climate has led policymakers to ask if the tax system is still fit for purpose. The European Commission has brought state aid cases against the Netherlands, Ireland and Luxembourg. What is curious is that state aid rules aim to safeguard competition in a sector by avoiding a state favouring one firm over another. The Lux Leaks files seem to suggest that these tax rulings were prolific, rather than targeted at favoured firms. This leaves us with the question: is state aid the right tool when reform of the tax system is the objective?

In a heated political environment the focus on Internet firms seems to have been politically convenient. However, reforms need to take into account the changing nature of the global economy, reinforce rather than fracture the digital single market and apply even-handedly across sectors.

James Waterworth is Vice-President, Europe for the Computer & Communications Industry Association (CCIA)