Digitization is transforming the world in general and business in particular. Taxation is no exception. The transactions and the production processes themselves are carried out differently, which influences the configuration and tax collection of the digital giants, but also of all other companies.
Many companies, states, organizations and individuals often have very different visions. Not infrequently, interests are at odds. In the business field, the legal framework, in general, and tax, in particular, is one of the factors that contribute to shaping the possibilities that different profiles of companies can support their growth processes and even ensure their survival.
How much taxes do Facebook, Airbnb, Google pay…
If we look at their accounts, we see that, for example, Alphabet (Google’s parent) paid 19% taxes in 2016. Facebook, for its part, was at 18%.
However, these percentages can give us too narrow a vision. Quantifying the taxes of digital giants is a little more complex than going to mere accounting figures. Usually, we are interested in several issues, among which are:
- How does your activity affect the tax collection in different countries?
- Who ends up paying the bulk of these taxes?
- How does the taxation of digital giants affects competition between companies?
- How does the fiscal regulation of these activities affect economic growth?
Accounting can only show us one side of the coin. However, it does not quantify many concepts of the fiscal impact of digital giants.
Taxes on digital giants and relationships with their workers and suppliers
The salary paid to its workers shall be included in the accounts as a personnel expense. However, the taxes that legally correspond to the workers affect that salary. As a general rule, workers will be required to declare it in their country of residence. For this reason, one of the many considerations that multinationals take into account when establishing workplaces in one place is the taxation of the salaries of their workers.
Especially important are the jobs in which many companies compete to find the best candidates. In such cases, they know that even if it is formally stated that the income tax is paid by the employee, if they want to hire the most suitable people, they must pay higher salaries to compensate for this fiscal cost.
This type of work has an important relevance among large digital companies, which seek to attract and retain the most appropriate staff to design and execute complex technological projects. However, this fiscal cost may seem invisible, insofar as it is formally paid by the worker and counted as a fiscal expense, not a personal expense.
Something similar happens with suppliers. If they want the best, the digital giants are forced to pay the higher tax costs. However, ac for this extra cost will appear as expenses of services and supplies.
On the other hand, with less specialized suppliers and workers, the opposite can happen. That is, even though it is formally stated that the digital giants take on some fiscal expenditure, they are forced to accept lower pre-tax pay. Otherwise, these large companies would look for other alternatives.
Customers and Taxation of Internet Giants
Many of the goods and services offered by digital giants have features that make them substitutable. For example, this is the case when you have a direct competitor or when you can meet a particular need or desire in another way.
In such cases, the taxes formally charged to their customers may lead to a reduction in the prices they receive. That is, in reality, they end up costing (in part, at least) the digital giants themselves.
In most cases, both customers and suppliers will pay part of the cost of the tax. That is, the establishment of a tax can, at the same time, raise the prices paid by customers and reduce the perceived by the company. In addition, it may lead to a decrease in the quantities sold.
The fiscal impact of the push of the Internet giants to digital transformation
There is a fiscal effect beyond the taxes that, in one way or another, the Internet giants cost. They are changing the world, making certain activities flourish, while others are losing strength. They do not do it alone, much less, but they are protagonists in that process. Logically, this fact has a fiscal impact.
Globally, it is expected that more activity will be created than destroyed. That is, it is thought that digital transformation can bring economic growth. As most taxes are linked to the collection or utilization of income, it is likely that you will end up collecting more.
Where do they pay taxes in Europe and/or the US?
Regardless of who actually ends up paying the tax, it is important to know which country will raise it.
Most countries have a tax levied on the entire world income of their resident companies. However, it is also possible that the benefits obtained in the interior of the country are taxed by foreign companies.
Therefore, double taxation can be given in the country of residence and in the country of the source of those benefits. There are international agreements to avoid it. In these, measures can be taken such as limiting taxation at the source or establishing mechanisms to tax in the country of residence what was paid in the other state.
However, despite the agreements, the system is never perfect. On the one hand, it is possible to produce assumptions that end up being paid in two countries. On the other hand, there are often gaps that allow companies to plan their activities so as not to end up paying at any or choosing a low taxation territory.
Most digital giants are accused of practicing what is called treaty shopping. It consists of creating partnerships in the appropriate country to benefit from the most favorable agreement. It seeks to avoid paying so much in countries where the majority of its customers don’r reside, diverting the taxation to a third party country where the taxes are much smaller.
They also use tax havens to hide information and obtain low taxation. And, in addition, there are many legal interpretations that are carried out on the fringes of the fraud of the law in which they are protected. Finally, they also rely on the complexity of certain valuations.
Tune in tomorrow for part 2…