The world’s most powerful and wealthy countries have decided to take seriously the problem that has robbed them of billions of dollars for years – taxing digital companies whose products are difficult to account for, and therefore the largest corporations pay taxes on profits from their sale where the rate is lower. For a long time, Google, Facebook, Apple, Amazon and the like managed not only to seriously save money, but also to quarrel among themselves the leading economies of the world, unable to share a tidbit of the pie. But now they have teamed up for a common goal – to make intractable merchants pay. The latter unexpectedly say that they are only happy to cooperate with the authorities. Meanwhile, Russia is already preparing to capitalize on the new initiative. Big payoff – in the material “Lenta.ru”.
The G7 countries (USA, Canada, Great Britain, Germany, France, Italy and Japan) at the summit in British Cornwall decided in the near future to introduce a new tax, the object of which will be the profits of IT companies. According to preliminary agreements, its minimum size will not depend on a specific country and will be 15 percent, and may be increased in the future.
The decision has already been approved by more than 130 countries (slightly more than two-thirds of all UN-recognized states in the world), but it is too early to consider the issue resolved. To fully implement the plan, there are still many instances to go through – the first step is to come to an agreement at the July summit of the finance ministers of the G20 countries. However, many economists and bureaucrats are already glad that they managed to get things off the ground. British Treasury Secretary Rishi Sunak called the initiative historic and said his country will now receive fair pay from “the largest multinational technology giants.”
International taxation has long been a sensitive topic for the global economy. The largest companies from all over the world are registered in countries with low rates (not necessarily in classic offshores) and are in no hurry to return part of their earnings to their homeland. Many resort to complex schemes using several jurisdictions at once. For example, the “double Irish with the Dutch sandwich” assumed (until it was liquidated last year) the connection of two companies from Ireland and one from the Netherlands: the latter acted as a “seal” through which profits to the parent structure were transferred in the form of royalties for the use of intellectual property.
American corporations, unwilling to share with the state, have kept their overseas profits in the accounts of local branches for decades – according to some estimates, about $ 2.7 trillion in 2017. US law allows her to be freely invested or directed to the development of a unit without paying taxes until it returns home.
To turn the tide, former President Donald Trump carried out a major reform in 2017, part of which was the introduction of a special tax on the repatriation (return to American banks) of foreign income. Instead of the standard 35 percent income tax, such transactions are now subject to a one-time payment of 15.5 percent or even 8 percent (depending on the type of assets in which the returned funds were invested). Moreover, all new overseas profits are now taxed only at the state level. But even such a measure did not work much: instead of the expected $ 4-5 trillion, the companies returned only a few tens of billions, mostly spending them on share buyback – an alternative to dividends way to share profits with investors.
In a special position
IT companies have always occupied a special, more advantageous position. An ordinary company selling its own or someone else’s products, in any case, is forced to pay taxes at the place of operations – in the country where the branch or subsidiary is registered. The head office can move to a jurisdiction with preferential treatment, but it will apply only to those funds that can be collected from divisions around the world – through dividends, interest or complex schemes. However, this money will be taxed elsewhere anyway. This is the manifestation of a principle that many economists and top managers consider unfair: the earned by the company is actually taxed twice – in the form of profits and dividends (interest on loans).
But the products of IT companies are too specific. Nowadays, it is less and less presented on physical media and is increasingly sold online – through licenses, patents, and just separate files. Nothing prevents Google from selling a song or album of a copyright artist from anywhere in the world. The buyer can simply download them to his device from the server or get unlimited access to the source. Where he will be at this moment does not matter, because the seller is not a branch of the company in his country, but the head office (or a regional one, designed for many countries at once). By all formal signs, the profit is generated at the place of registration of such a branch, which means that it is supposed to pay taxes there.
It is logical to locate offices in countries with low taxes, especially if they are respected members of the European Union and are not associated with semi-legal offshore companies. This is exactly what American tech giants such as Google and Apple, Facebook and Amazon have done – together they got the acronym GAFA, which many governments associate with fraud and default.
They entered into special secret agreements with the Irish authorities. So, back in 2007, Apple agreed with Dublin that the effective (real) income tax rate for it would be only 1.9 percent – while in the United States, companies were required to pay 35 percent. The deal was framed in a complex scheme in which the corporation created several subsidiaries in Ireland and Bermuda.
All of them were called “head offices”, but in reality they conducted almost no activity, except for meetings on the Internet, did not have premises and staff, which did not prevent them from transferring intellectual property rights to each other and paying compensation under internal corporate agreements (which were included in expenses that reduce the total profit). Only the main office in Ireland was really operating, and its coverage extended to all of Europe, the Middle East, Africa and India. Sales of iPhone and other devices, including in Russia, were carried out through licensed resellers not legally related to Apple.
However, this was enough to comply with Irish laws that allow a company not to be considered a resident (and therefore exempt it from paying taxes) if it is operated from another country. For example, in 2011 one of Apple’s Irish structures – Apple Sales International (ASI) – made a profit of 16 billion euros, but almost all of them were transferred to one of the “head offices”. Only 50 million remained in Ireland, from which the tax was paid – at a higher than usual rate of 20 percent. Other local “daughters” also “highlighted” only a small part of the income, taxing them in full. As a result, that same effective rate was less than two percent, despite the fact that the usual conditions in Ireland are already the most lenient in Europe – 12.5 percent.
12.5 percent makes up corporate income tax in Ireland – one of the lowest in the EU
Similar tricks were resorted to by Facebook (which listed almost everything it earned to the Irish affiliate) and Google. The latter, however, claimed that she pays “the bulk of the tax due” at home, that is, in the United States, on an equal basis with everyone else. The global average effective rate, according to management, was 26 percent in the mid-2010s. But the journalists managed to find out that for several years the corporation was withdrawing most of its profits not only to Ireland, but also to other European countries, with the authorities of which it was possible to agree, as well as offshore. So, in 2017, Google paid 3.4 million euros in tax in the Netherlands – with a multi-billion dollar profit.
Numerous investigations were carried out not only by the media, but also by the European Commission. In particular, she was able to find out that in 2014 taken separately, the effective tax rate on income from European operations of Apple was at all negligible 0.0005 percent. Under pressure from the EU authorities, Ireland had to abandon special relations with world-famous companies and even close a loophole for using the famous “double Irish with a Dutch sandwich” scheme. In 2016, Apple was charged an additional 13 billion euros, which, according to Brussels, it had underpaid to the European budget for several years. But four years later, the court revised the decision and canceled the fine, agreeing that there were no developments in Europe, and therefore no full-fledged activity.
Came to their senses
This state of affairs did not suit the EU, which did not want to miss out on a significant source of income in the form of taxes from the digital economy. According to the World Bank, it accounts for 15.5 percent of world GDP and has grown 2.5 times faster than it in the last 15 years. The coronavirus pandemic has not become a serious hindrance either – after all, online-tied products still have access to consumers and do not suffer from restrictions.
The first initiative, which claimed to be universal, dates back to 2013. The Organization for Economic Co-operation and Development (OECD), which includes 38 most developed countries, launched the BEPS Plan (a plan to combat the erosion of the tax base and the removal of profits from taxation). It was aimed at countering money laundering and tax evasion as such, but the authors already recognized that in the digital age, the main efforts would have to focus on the tricks of technology corporations.
The BEPS plan has been adopted by many countries, including non-OECD Russia, but still has no global binding status. Participants in the plan must fulfill only 4 out of 15 of its points. In 2018, the EU authorities proposed to introduce a temporary three percent tax on income from advertising on the Internet, earnings from social networks and online stores, as well as revenue from the sale of user data. However, the United States opposed it, which also claims the taxes of its leading companies, regardless of where they earn. Washington’s position is based on the fact that it was America that gave the world corporations that create products, without which it is sometimes difficult to imagine modern life: touchscreen smartphones, cloud services, marketplaces, aggregators and delivery services.
The discontent was not limited to words: two years ago, the United States threatened to introduce retaliatory taxes on the income of European companies in its territory. True, it was not clear to whom they would be directed in the conditions of the world domination of American players. But the White House quickly found a solution in the spirit of a trade war: back in 2019, taking advantage of the fact that Paris was one of the first in Europe to introduce a digital tax, selected several French goods (mainly luxury goods) and announced that in which case he was ready quickly impose a 25 percent duty on their entry into the United States.
Already in June 2021, US Trade Representative Catherine Tai spoke about the introduction of tariffs against six countries at once: the UK, Austria, Italy, Spain, India and Turkey. They are considered by Washington to be the leaders in discriminating against American technology corporations through digital tax. The delinquent will be given a six-month respite, during which they will have to negotiate with the United States on a bilateral basis, or achieve the adoption of rules common to all that would suit America. Otherwise, “traditional” goods from six countries, totaling $ 2 billion, will be subject to 25 percent tariffs, effectively undermining their competitiveness in the US market.
As a result, the initiative at the EU level stalled, but some countries began to intercept it, including those outside the union: Turkey, Canada, India, Kenya. By early 2021, nearly 50 countries and jurisdictions had or announced their own digital taxes. The parameters of most of them are similar and follow one of two principles: either the total profit in the country or individual transactions are taxed. At the same time, as a rule, not any companies fall under the tax, but only the largest ones – those who satisfy the conditions of a double filter: by global revenue (usually at least 750 million euros per year) and earnings in a particular country (from 5.5 to 25 million euros).
Photo: IRS Building / Susan Walsh / AP