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Don't Sweat The Franco-German Tax Grab On Tech Company Profits

by: Tim Worstall
Tim Worstall
Tech, banks, gold & precious metals, natural resources

Led by France and Germany, there's an idea to tax the tech companies in a different and more expensive manner.

Aimed at Google, Amazon, Apple, Facebook, to tax them on turnover, not profits.

Don't worry about this, the internal contradictions are such that it won't affect AMZN, GOOG, FB or AAPL any time soon.

We have multiple reports that, led by Germany and France, there is going to be a new attempt to tax the various tech giants on their European activities. This is aimed at that well-known quartet, Google (GOOG)(NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Facebook (FB) and Apple (NASDAQ:AAPL) plus the various more minor companies using the same tactics. The essential background is that the tax collectors are irate at the manner in which they think these companies aren't paying enough tax.

The problem with what they're suggesting as a solution being that the international tax system is carefully set up to tax in the manner that it does. Their solution attempting an entire overturning of a century's worth of work to get to where we are today. That's not something that is going to be achieved - if at all - in any timescale we care about. As the FT puts it:

Paris and Berlin are mounting a joint offensive to tax internet giants such as Google and Amazon based on revenues generated in EU countries, a change that would wreak havoc with many technology groups’ business models in Europe.

Wreaking havoc is rather overdoing it even if it could be done. Yes, it's certainly nice that these companies can pile up profits offshore without paying much tax. But they can't then send that money to shareholders without paying US tax on it. So being taxed at European rates (lower than the US) doesn't break the business model, it just alters the size of the offshore bank account after the operation of the business model.

The tax model in use here is that one company, in one of the EU countries, makes all, or near all, of the sales across the EU. Most use Ireland, Amazon Luxembourg. It's inherent in the very idea of the European Union's Single Market that a company be able to do this. Further, that they pay their profit tax in whichever country they're selling from, not the one they're selling to. That's also in every double taxation treaty going all the way back to League of Nations days.

Several of the European Union’s major economies are calling for tax reform across the bloc that responds to where tech platforms generate revenue, not just where they book profit — arguing that the current system allows digital giants to minimize tax liabilities by using subsidiaries sited in low-tax countries such as Ireland.

That is indeed the change that is being proposed, that it's where revenues are which should be taxed. But it's also worse than this, it's the idea of a revenue tax itself, not something proportionate to profits:

Per Reuters, the finance ministers of France, Germany, Italy and Spain have all signed a joint letter to the presidency of the EU (now held by Estonia) as well as the European Commission, saying the companies need to be taxed on total revenue rather than profits.

As we all know, Amazon doesn't really, over the years, make a profit at all, reinvesting everything. Apple does very well indeed in profits. We do tax companies on their profits, not their turnover, for this very reason. One suggestion is that the tax would be set at 5% of turnover. Forget Amazon, that would wipe out Walmart's profits. And not make all that much of a dent in Apple's. It's simply not a good method of taxing in the first place, which is why we don't use it.

So, to think about the effect of this upon the profits and fortunes of the big tech companies. In the sort of timescale that we investors are worried about, pretty much nothing. For it's simply not going to happen that a century's worth of the very basis of the international tax law is going to be overturned in anything under decades. The basic rules of the Single Market would have to be changed, every double taxation treaty. No, just not something that can be done swiftly, if at all.

And there's one other delightful little point. The French are a little raw at this point because Google just won a tax case against them. France insisted that Google's sales to French people were happening in France, we want a couple of € billion, please. European Union law, backed up by the European Court of Justice, said, well, actually, all those sales took place in Ireland. There is no revenue, thus no profits nor tax, attributable to France.

So, by trying to tax revenue in France they're trying to tax something that we've all already agreed simply does not exist.

This simply isn't going to happen on any time scale that we investors need to worry about - if it ever can get through its own internal contradictions and into law at some point.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.