/Gazing into Europe’s Digital Crystal Ball

Gazing into Europe’s Digital Crystal Ball

France plays taxation tug-of-war with Google, may leave Europeans in the mud

Big companies not paying enough tax in Europe is not a new story. On the day to day, the troubles between the European Union and corporations fluffing their taxes do not typically impact the immediate lives of the average citizen. But imagine checking your favourite digital content storefront tomorrow and seeing a tiny price hike. The items on your Amazon wish list, app store, and Apple Music subscriptions all go up a euro.

You think little of it, but you’ve felt the bee sting of the digital giants passing off their new tax requirements onto you.

This is called artificial inflation, and this is one of potential realities facing European consumption of digital goods in the near future.

The French crusade

The harmonious solution that taxes the digital giants whilst also maintaining their current dealings in Europe still remains unreached.

At the time of writing, journalists and ministers alike hold their breath as they watch from the sidelines. Member states raced out of the gate in September, France taking the lead. Emmanuel Macron forged a determined path to the Commission’s front door, leading a lynch mob of over ten member states. Their goal was to find a solution to the ‘digital giants’ squatting rent-free in Europe. But this has only succeeded in angering the Google gods, with Facebook, Amazon and company in tow.

Why France has lead this charge is because the tax laws that apply for all of the Union are outdated, as they did not account for a digital economy. The tax laws for the Union are primarily aimed at a physical economy of trade and brick-and-mortar retail. When Google crosses the waters over to Europe and sets up an office in the Western hotspots, these become the only states with any ‘concrete’ obligation to pay taxes.

No grand EU solution

The European Commission are aware of the situation, but their hands are tied without unanimous agreement on a tax amendment. There will be no such agreement either, as Ireland and Luxembourg offer lower corporate tax and do not wish to rock the boat over fears that they could either drive the giants out of their offices, or worse.

An EU correspondent for Politico following the story, wishing to remain anonymous, was unwilling to comment on what this worse scenario is beyond stating, “this is looking into the crystal ball.”

For the states skeptical of a tax amendment that accounts for greater transparency in the digital economy, they have sat in the seat of grand speculation and gazed into the ball. The contentious arguement that these seers have offered is that the giants will pass the tax onto the consumer with more expensive digital content/products, which will lead Europeans to seek out alternative storefronts and platforms that are not as harmonious with Union. Danish Finance Minister, Kristian Jensen, told Politico that this could drive Europeans towards Chinese and US digital markets instead.

France retreats, considers another plan of attack

The likehood of Europeans switching from Google to Ask Jeeves and YouTube to Vevo is extraordinarily unlikely. It is still important to consider the confidence that some member states have in their consumers and the market forces led by the digital giants. The discourse around such a scenario has also led France to reign in their crusade with other member states regarding a harsher European digital tax with a more moderate, short term proposal in the works as a kind of experiment.

So as the interested finance ministers convene on Tuesday (December 4), we await the potential impact of a short-term tax measure that forces the mighty digital tenants to offer up some rent.

This is planned to be in the form of revenue tax, rather than the current tax on profits. For those outside the business world, a revenue tax will simply be measured against the total grossing sales of a company. Profits, on the other hand, can be washed into low-tax figures by citing expenses and other costs or accounting measures which can greatly reduce or eliminate the taxable margin of a company.

Francesco Guarascio, EU finance correspondent for Reuters, has delayed to comment at this time, but is confident that this Tuesday’s meeting will provide answers to what the proposed tax measure/s will mean for EU citizens.

Visions of a digital single market

If the crystal ball can tell us something – it can show us what has happened in other parts of the West when the tax man comes for the digital giants. But when opening up the pandora’s box of speculation, it is important to keep in mind how the digital single market complicates the harmony (or lack thereof) of any harsher tax measures against the digital giants. 

Offering up the same charms of the European single market, the digital single market aims to maintain same the free movement of goods, persons, services and capital that breaks down internal borders and makes the EU economy so streamlined. Digital borders still exist to some extent, though. Before July 2017, travelling from your own member state to another would require you to activate roaming on your sim card once you were detected within the ‘borders’ of another state. This resulted in egregious telecommunication charges for the European going next door. Now that carriers work together to ensure even pricing, that border has effectively been removed in the digital market.

The remaining digital borders are those which benefit some of digital giants over the European. Content rights licensing sees companies like Sony or Universal being able to sell the viewing rights of their films to the highest bidding digital platforms within each European member state. A Belgian travelling to the Netherlands for a weekend may not be able to finish their Friends marathon because Netflix was not able to secure the Dutch licence the show from a competitor, whereas they did in Belgium.

Content rights throw up a digital border, viewing each state as an individual market rather than a single, European market. The issue here is that companies can discriminate different markets within Europe and makes 28 potential sales. The Belgian then must endure the heartache of being left without Joey and Ross’ endearing shenanigans for days spent visiting European cousins.

The digital walls are knocked down

This grave threat facing the hard-working, sitcom loving European has been top of the agenda at the European Commission. Little do they know that unless they can appease Macron and his posse of European tax ministers, the Commission’s hopeful goal of a digital single market by 2020 could be held to ransom.

The Commission’s Chief Spokesperson, Margaritis Schinas, announced during a midday briefing on November 21st that the EU will be banning unjustified geo-blocking. He further stated, “for business, the new rules mean more legal certainty to operate across borders.”

Geo blocking restricts the online purchasing power of an individual by detection their geographical region, based on IP address or GPS, and limits what they can purchase or access from digital retailers, or view on streaming platforms. Removing this will grant all European’s the same theoretical Netflix library, to recycle the example.

This all sounds promising, except the tricky issue of the power struggle for who would control the digital domain of this single European economic space: the EU or the international digital giants.

If France succeeds in a tax plan that targets the digital giants of participating member states, the EU institutions, member states, digital giants, and citizens will all find themselves together in a stand-off.

Here are the likely conflicts of interest that will be brought to the table by these parties.

What is at stake

France leads a dozen or more member states in working towards a long term revenue tax that makes the digital giants account for all revenue, rather than profits, that are conducted within the respective state.

If said tax goes ahead, pandora’s box is opened. Just like what has happened in the US and Australia, digital products and services gain a consumer facing tax. This results in an overnight inflation of digital goods for the customers within participating states, similar to how VAT tax was enacted in Europe.

The digital giants make the Europeans foot the bill, essentially making them pay for the privilege for having the peaceful giants reside within their territory. In the West, this has typically been legislated on the government’s side rather than a direct penalty from the digital giants to consumers.

The citizens fight back with the use of VPNs, or virtual private networks. These allow a person to disguise their PC or smart device as operating within another country, therefore paying the cheaper prices of a neighbouring state that does not tax the companies or consumers with a new measures.

The EU’s proud leap forward in removing digital geographical borders by banning geo-blocking is cut dramatically short, hamstringing the digital single market project. Despite even small price differences between member states due to tax, the importance of being French or Irish could be a euro extra per movie rented on Google Play. As disgruntled Europeans are caught in the middle of this tax war, they will turn to VPNs as a way to smuggle themselves across the digital border.

Back to reality

As we look away from the opaque crystal ball and step out of the skeptic’s tent, it is hard to know who has the best interests of the European digital consumer at heart. And as France marches home later this week, we wait to see whose neck sits at the end of the guillotine.

UPDATE

(10/12/2017)

The European Commission has decided to negotiate on a draft proposal that will go ahead with taxing revenue rather than profits. This is an unexpected show of European solidarity, as the divisive nature of this issue meant it was unlikely to enter into the Commission in 2017.

Source: Pixabay

Source: Pixabay