What's going on?
The European Union on Wednesday proposed a new tax aimed at large tech companies operating within its borders – hot on the heels of recent US tariffs on steel and aluminum imports. Coincidence?
What does this mean?
American tech firms like Facebook, Alphabet and Amazon have become big players in Europe. And while governments there are keen to suggest that their countries are open for business, they’ve also begun to complain more loudly that the Americans are making billions from European consumers while paying substantially less tax than other companies (both domestic and foreign) operating in Europe.
The reason? Tech companies are fond of channeling their profits through lower tax jurisdictions. Now, in an attempt to prevent them from dodging almost the entirety of their European tax burden, the EU is proposing that companies with annual global revenues of more than €750 million pay a 3% tax on the money they make from certain online services in Europe on top of what (likely) little taxes they’re currently paying.
Why should I care?
For markets: Taxes on revenue rather than profit are fairly unconventional.
Almost all businesses in developed economies are taxed on their net profits (i.e. their income after adjusting for business expenditures like office space or wages). Some critics (including tech-loving Ireland) say that taxing raw income will give tech companies less incentive to spend and invest money in Europe.
The bigger picture: Tech’s day of reckoning may be dawning.
After a good decade of taking a fairly hands-off approach, Western governments appear to be stirring from their slumber and demanding that tech companies assume more “social responsibilities” (essentially code for greater regulation). Whether that’s related to how tech companies communicate the news, influence politics or even – gasp – pay taxes (which, remember, fund public goods like hospitals), it seems that big tech firms will have to recognize the fact they’re no longer itsy-bitsy startups, but powerful, systemic actors in both global society and the world economy.