What's going on?
Some European politicians are preparing to put Silicon Valley companies in their crosshairs, including the finance minister of France, who said last week that Silicon Valley companies cannot continue to pay little-to-no tax in Europe.
What does this mean?
Currently, some Silicon Valley firms doing business in Europe – like Amazon and Apple – tend to move their profits into low-tax jurisdictions – like Luxembourg and Ireland – where tax loopholes effectively allow their profits to be taxed near zero (read more here). To address this, some European politicians are proposing a “turnover tax”, which would tax an amount of these companies’ total European revenues instead of their profits. Revenues are more difficult to shift to lower-tax countries because they are more geographically-bound than profits, which depend on costs (if a company develops its product in one country and sells it in many other countries, it has some flexibility in where it can declare its costs).
Why should I care?
For markets: Turnover taxes can be lethal against startups and loss-making companies.
Normally when companies pay tax, they only pay it on the profits they’ve made. Instituting a tax on revenues would mean taxing companies even if they haven’t made a profit. Obviously, if a company isn’t making a profit (i.e. most startups!) but has to pay a tax bill, then it’s likely going to make it tougher for it to stay in business.
The bigger picture: Politicians are considering other ways to have tech companies contribute their fair share.
The practice of profit shifting through tax havens is well-known around the world (remember the Panama Papers?). Bringing the trillions of dollars that are parked in these havens into the economy could create a lot of jobs and stimulate a lot of investment, so politicians in both America and Europe are talking about how to channel this money back into their respective economies.