Pay-to-Use Apps: Taxing Digital Companies

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Dylan O’Neill looks at how digital companies could change their services to accompany the tax monopolization sought by member states in the EU.

 

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Speaking to UCD French Society in November 2017, French ambassador Stephane Crouzat informed students that France wishes to have a “European level playing field” brought about by tax monopolisation. Ireland currently has a corporation tax rate of 12.5%, one of the most competitive in Europe. France’s corporation tax rate is more than double that, at 33%. The French government has said that the rate will drop to 25% over the next five years, according to Mr. Stephane.

Companies such as Google, Apple, and Facebook are all located in France, but because of booking revenues with their Irish subsidiaries, are not taxable in France.

A particular issue that Mr. Stephane said needed to be addressed was how to tax digital companies. Companies such as Google, Apple, and Facebook are all located in France, but because of booking revenues with their Irish subsidiaries, are not taxable in France and have avoided paying the higher tax rate.  This loophole is exploited by many digital companies and needs to be addressed for fairer taxation, expressed Mr. Stephane, “it’s not fair that Google makes all this money in France and doesn’t pay any tax in France”.

Facebook, which currently has more than 2.2 million Irish users as of 2017, according to Connector.ie, has offices in many cities across the EU and has benefited from the current system of taxation. If companies like Facebook were to face an increase in corporation tax, payable to the countries it has offices in, what would be the knock-on effect for how it is run, and more importantly, how would it affect its users?

Perhaps these companies will follow in the footsteps of Microsoft, who in 2015, said that charges for Skype would increase for consumers in EU countries. Could this mean that if Facebook is forced to pay a higher tax rate, they will charge users for video calls, voice messages and even private messaging?

App developers are most likely to be hit the worst in this scenario.

Other companies such as Apple and Google, take a 30% cut of money made through their online stores. According to the New York Times, they have refused to reduce this percentage. Despite this, Apple and Google continue collecting the VAT charges from individual countries on sales, to cover the tax increase. Undoubtedly, this step is to avoid EU customers having to face an increase on the price of games, apps or other digital downloads. However, app developers are most likely to be hit the worst in this scenario. By facing a reduction in the revenue they receive from sales, these companies will face difficulties in production, redundancies, and possibly closure.

Is there a way for consumers to have their digital cake and eat it too? In September 2017, the EU commission launched a new agenda to “ensure that the digital economy is taxed in a fair and growth-friendly way.” One of the key priorities of the Commission was to ensure a digital single market among member states of the EU, by taxing digital companies in a fair and effective manner. Pierre Mocovici, Commissioner for Economic and Financial Affairs echoed the desires of Mr. Stephane Crouzat: “We now want to create a level playing field so that all companies active in the EU can compete fairly, irrespective of whether they are operating via the cloud or from brick and mortar premises.”

The Commission has since put in place steps to achieve this level playing field. Namely, reformation of the traditional tax economy to include activities which are based on intangible assets and data. These steps were proposed  to the G20 in Spring 2018 in a report, for binding rules in the digital single market, by the Organisation for Economic Cooperation and Development (OECD).

It will be interesting to see, in the wake of the G20, how these new rules in taxation will affect digital companies and how Ireland will fair in the single market, now that it’s essentially lost its edge with the larger countries such as France and Germany. One thing is for sure, any change to how Apple, Google, and Facebook are run, will be picked up swiftly by users. It looks unlikely that the reception will be positive overall, just look at how people reacted to the new Snapchat update.

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