Daniel Lacalle

The EU proposal of a unilateral revenue tax on technology giants. A massive mistake

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One of the most worrying proposals of the European Commission is to impose a unilateral change of the fiscal rules for technological companies. Taxing tech giants on their revenues instead of their profits.

It is frankly disheartening that the European Union, which promises to defend free trade and technology, makes mistakes that affect development and innovation. Instead of considering why it does not create technological giants, it decides to implement measures whose negative impact far outweighs the supposed benefits.

The proposal carries many more negative than positive effects.

It suggests that multinational (North American) technology companies pay taxes on their revenues instead of their profits.

First, it is a clear discrimination against some companies due to their activity, introducing a very worrying element in terms of legal certainty, competition, and fairness. In addition, if such a move were taken in all sectors, it would hurt many European multinational conglomerates, because they would almost all fall into losses and huge financial problems. Those so-called “national champions” that have lost the battle of innovation for years.

Second, it can be interpreted as a measure of commercial war directed against companies only because they are US based. At a time when the world is trying to avoid protectionist temptations, it is easy to label this proposal to be just that, protectionism that seeks to increase the tax burden at any cost, instead of facilitating innovation and technological development in Europe.

The risk that other countries may take similar measures against European companies is not small and should not be ignored. What would happen to the big European multinationals if the countries where they operate and generate more than 55% of their revenues did the same as what the EU proposes?

Third, it is the consumer who will suffer the consequences. The EU thinks of alleged lost tax revenues which were lost not due to “fraud”, but because the EU has imposed a system that discourages the creation and attraction of capital from innovative companies. But, above all, the only thing that such a measure achieves is that products and services become more expensive for the European consumer. As the Danish Finance Minister Kristian Jensen explains, “If we make business more difficult in Europe, then maybe we are leading to the use of American or Chinese products.”

There is a reason why profits, not revenues, are taxed, and that is why it has been done for many decades: Because it is much more positive in creating jobs, investment, and growth for all.

Tech giants do not pay taxes?

To say that these companies do not pay taxes is incorrect. They pay what the law specifies according to the country where they generate added value, as do the European or Japanese multinationals. They pay more in social contributions, direct and indirect taxes, local and regional taxes, than many of the local large companies.

The European Commission is obsessed with corporate taxes at the same time as it gives giant subsidies to obsolete sectors, and forgets about the amounts paid in other taxes, and the positive effect on direct and indirect employment, investment, and benefits for the consumer.

It is ironic that this unfair taxation of companies should be enforced while the European Union itself grants huge deductions in the same corporate tax to sectors with lower added value and less innovation.

Taxing revenue is perceived as a disguised border tariff, a measure that destroys much more than what it intends to protect. Tariffs do not benefit consumers because they make products more expensive and scarcer, but they also destroy potential investment, just when the European Union should be attracting technological capital and preparing for digitization from a leadership standpoint.

By looking only at taxes and – even worse – only at corporation tax-, we forget the impact on the economy and its multiplier benefit. According to Deloitte, only one of these companies, Google, generates a positive impact on the Spanish economy of more than 7 billion euros.

The only thing that is achieved with this measure – which I hope will not be implemented – is to break the perception of legal certainty, as it is oriented to a single sector and to very specific companies.

Disruptive technologies  will always generate lower tax revenues in the short term but much more growth and better quality of life, and thus better medium-term fiscal revenues.

Imagine if the United States suddenly decides to do the same with the European sectors that are leading growth and foreign investment in North America. It is a ticking bomb that starts from the incorrect view of supposedly “lost tax revenues” which is often calculated in a questionable way.

Instead of thinking about creating tax revenues by attracting investment and encouraging a change in the pattern of growth, the danger is that what is achieved is to worsen the situation for consumers and companies.

The proposal is misguided. It offers no solutions to attract the enormous growth and employment potential of disruptive and innovative technologies and focuses on a counterproductive short-term repressive vision instead of the opportunity offered by the new industrial revolution.

Our leaders have to realize that disruptive technologies will always generate a lower tax revenue in the short term but much more growth and better quality of life, and thus better fiscal resources in the medium term. And that what is lost, on the one hand, ends up being an enormous gain on the other.

The European Union’s policy cannot be focused on defending the past, but to lead the future.

Within ten or twenty years, the European Union could be a global engine of growth and innovation or follow behind its counterparts in creating technological giants. It cannot fall into the error of an interventionist and short-term policy.

It would be important for multinational companies in all sectors to work together to find solutions to the fiscal and technological challenge that does not jeopardize employment, investment, and growth. There is a long road ahead. We are not going to win the future trying to return to the 70’s.

Daniel Lacalle is Chief Economist at Tressis, SV a PhD in Economics and author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP)

 

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