The three percent digital tax

France among other nations has been calling for a three percent digital tax, for instance as might apply to Facebook revenue connected to France but booked say to Ireland, which has a lower corporate tax rate.  (The exact meaning of “connected to France” is indeed murky here, if you are wondering, but proponents might have in mind a simple France-to-France transaction, such as selling an ad to a French buyer for a French product; there are more complicated grey areas.)

As is so often the case, the debate is focusing on how little tax some of the major tech companies pay directly to the French treasury, rather than on tax incidence.  In reality, the major tech companies may already be bearing a quite significant tax burden.

Let’s say you believe that Facebook has significant market power over the advertising market in France.  That is not exactly my view, but let’s run with it — a competitiveness assumption will hardly boost the case for taxing Facebook.

At this point your mind already may be thinking that the monopolist in the supply chain will bear some significant portion of a tax, just as land bears tax burdens in a Georgian land monopolist model.

Let’s now say that France boosts its VAT — how will that impact Facebook?  Well, the short-run effect is that directly taxed good and services will tend to cost more.  That in turn will create pressures for them to advertise less, because their potential market size and potential profits are smaller.  If they advertise less, they are spending less money on Facebook ads.  Facebook profits go down (remember, Facebook is selling those ads above marginal cost), and thus Facebook bears some of the burden of the tax.

Do the same analysis in terms of levels rather than changes, and you will see that Facebook bears some of the burden of the current French VAT.

So the French VAT brings money into the French treasury, and some of that money comes from Facebook in an indirect form, in addition to whatever direct tax liabilities Facebook may bear under the current French VAT structure.  Furthermore, the net tax burden on Facebook is higher, the more monopolistic is Facebook in the ad market.

I should note that there are other ways you can play around with the assumptions.

A good rule of thumb is that you should place less weight on tax discussions that do not focus obsessively on tax incidence.


Isn't this all a prelude (along with the UK) to the real elephant in the room, the OECD tech tax framework? The passing mention of Ireland in the first paragraph is more the real issue being addressed. In other words, how best to deal with the issue of arbitraging tax regimes which tech companies, pharmaceutical companies, and banks are quite adept at since much of their value is produced intangibly and the intellectual property can be assigned to a tax haven a world away with the click of a mouse.

You want companies to compete on providing the best product and service not on who can find the most tax havens or the most loopholes. Let's not make having bank accounts and subsidiaries in the Caymans or the Isle of Man as table stakes for global economic activity. This greatly warps the market for existing firms and for firms just starting out.

It is fair to bring up the concern of whether Facebook will be paying too much direct or indirect taxes and its attendant effects but there is a reason why things are moving in this direction.

Ah yes, the old "Double Irish Dutch Sandwich" tax squeeze play. One Irish company to lower US taxes, the other Irish to lower EU taxes, and the Netherlands to take advantage of their royalty payment loophole. You can even add a Bermuda in there like Google did to drive tax agencies absolutely mad.

This is another ugly side to capitalism that is often ignored in today's media. Can you imagine the absolute waste of talent and human effort by highly trained international experts in law, accounting, and banking to dream up these wildly, complicated schemes that actively contributes negative value to the world? Read the Double Irish wiki entry if you want to see how the sausage gets made.

+1 Gave a presentation on antitrust aspects of structuring international joint ventures at the invitation of Deloitte, and learned at the seminar on the surprising infinite number of ways multinationals offshore what should be domestic profits.

After that experience, began noticing how, in the documents supporting an acquisition by a multinational of a smaller firm, that the changes in tax models after the deal were listed as an "efficiency".

Don't expect this to be a matter of public debate. It's complicated, too complicated for the public to understand.

What I worry about is how multinationals have built this system which could be disrupted by OECD tax recommendations, exposing the inefficiency of US multinationals, but for the tax strategies which have propped them up.

And yet you say you don’t understand mood affiliation.

It’s literally being debated ... in this very comment section!

And it’s a glaring weakness in Tyler’s latest book.

It's clockwork_prior. Don't expect sharp rational analysis. He's just emoting. Slappy McFee's comment is amusingly correct.

This came from the OECD last week:

It basically updates the taxing rights of countries on digital services by creating a new tax nexus based on country specific sales thresholds (physical presence is not necessary).

That is essentially right but the reason things are moving in that direction are perhaps slightly different to what you suggest.

The issue is not the overall tax burden of tech companies. It is that in the "new" economy, value is disproportionately attributable to IP. One hand this is very portable, which is a problem but one largely already addressed by the US BEAT and by the OECD's BEPS 1.0.

The European problem is that they aren't generating any of this IP. So they are seeking to recalibrate the tax allocation away from the creation of value towards the consumption of value, to bolster their own tax nets that have been eroded by their own inability to generate valuable new businesses.

The IP is not the data, but the idea to charge rents on the data, IP owned in some island tax haven because that's where all the innovation is.

No one ever had the idea to charge for advertising based on whose eyes or ears are exposed to the ads until the geniuses in some island tax havens came up with the invention. It took the genius of those island tax havens for advertisers to get to place ads in local community news papers in the 50s to target demographics like Italians or Irish.

Of course, before the 70s, IP was simply a headstart as everyone was allowed to quickly copy, based on the Constitution's original meaning of "limited time".

Then the power of Red American took over and tried to suppress innovation. If you look at where innovation happens, where the rent seeking of IP permanent monopoly thrives, it's in Blue America.

Trump is the Red America champion of Blue America permanent IP monopoly rent seeking.

Rent seekers act to prevent workers being paid to compete. Supporting rent seeking is seeking to kill jobs and opportunity.

As Mulp has pointed out, the IP is not the user data. It is the algorithms, the user interface, the services, etc that bring the users there, incite them to "share" and gathers information on them allowing advertisers to target (and measure) their ads.

It is generated to 90+% by US-based programmers.

Facebook kowtows to China. Zuckerberg offered to name his firstborn after dictator Xi if he let Facebook through the Great Wall. He even handed over American data to Chinese firms flagged by US intelligence like Huawei. This generation of American capitalists have lost all their senses.

Its a real shame that as a guy who lives in Germany and who is fluent in German, you share UK data that is likely to already be a top hit on search for all the Anglophone readers here.

Why not report some data from German speaking media for German speaking nations? It would add more to the conversation.

"...for instance as might apply to Facebook revenue connected to France but booked say to Ireland".

That is almost an oxymoron. The revenue that is "connected to" Ireland is booked to Ireland and the revenue that is "connected to" France is booked to France. Indeed, the transfer pricing issue is how to attribute revenues (and costs) to various jurisdictions under transfer pricing principles ("attributable" in this sense is more accurate than "connected to"). France wants to deviate from currently accepted (OECD) international principles and if different countries apply different principles this inevitably leads to international double taxation of profits under an income tax analysis. France has numerous treaty obligations requiring them to adhere to OECD principles when imposing an income tax (but, this is likely a sales tax, see below, and that is likely the reason they've chosen this route).

While Cowen correctly talks about "tax incidence", I'm surprised he didn't discuss the more obvious: the proposed 3 percent tax on sales made to French customers is a tax on gross sales, not profits. Thus, it more closely resembles an upstream sales tax. Ultimately, it is the French customers who will bear the incidence of this tax and not the "tech giants". "Tech giants" will only bear some of the incidence of this tax (from a competitive perspective) for the simple reason that the proposal exempts companies with global sales more than Euro 750 million of which at least 25 million is attributable to French sales.

" proposal exempts companies with global sales more than Euro 750 million of which at least 25 million is attributable to French sales"

The proposal 'subjects' those companies to this tax, it does not exempt them.

Yes! Thanks.

'A good rule of thumb is that you should place less weight on tax discussions that do not focus obsessively on tax incidence.'

"You mean like this? 'Companies that do business in more than one country have long been a challenge for tax authorities, because they can structure their business in a way that minimises their tax bills.'"

I'd guess that was exactly the point?

Tyler's opinion is interesting but let's see what is the opinion of Facebook stated on Form 10-K (SEC filing Jan 31, 2019) . This specific issue is a "risk factor", further details on page 26

"the European Commission and several countries have issued proposals that would change various aspects of the current tax framework under which we are taxed. These proposals include changes to the existing framework to calculate income tax, as well as proposals to change or impose new types of non-income taxes, including taxes based on a percentage of revenue. For example, the United Kingdom, Spain, Italy, and France have each proposed taxes applicable to digital services, which includes business activities on social media platforms and online marketplaces, and would likely apply to our business."

"The European Commission has conducted investigations in multiple countries focusing on whether local country tax rulings or tax legislation provides preferential tax treatment that violates European Union state aid rules and concluded that certain countries, including Ireland, have provided illegal state aid in certain cases. These investigations may result in changes to the tax treatment of our foreign operations."

So, the EU Commission determined Ireland did provide help to some companies which distort fair competition with tax rebates.

Why should someone care if Ireland offers lower corporate tax rate? Because until 2014 Ireland was a net beneficiary of the EU budget. From 1973 to 2014, Ireland got foreign aid so their citizens could enjoy a life (welfare state) above their income.

Since a few years ago, the EU is after a larger contribution from Ireland to EU budget. If Facebook is taxed in Ireland and Ireland contributes to EU budget, Facebook does not need to be taxed additionally in France.

After all I'm no expert in the topic, albeit I think Tyler is oversimplifying the story . My first question would be: is this a French treasury issue (as framed by Tyler) or an EU treasury issue?

I think that there are two separate issues in the mind of European lawmakers and decision-takers.

(1) Is the amount of tax extracted to the GAFA optimal for Europe's interests. Of course, GAFA offer very valuable services, and taxing them higher would impose a burden not only on then, but on European consumers. Yet many people thing that there is a wide margin of progression for the taxes they paid before reaching the optimal.

(2) at whatever level the GAFA are taxed for their activities in Europe, there is the question of how the money raised is shared among various European countries. In the current system, Ireland takes almost everything.

I believe that in the public debate about this issue (which takes place mainly in the elite pro-europeans circles), (1) is much more important than (2). Indeed, the EC insists for Ireland to raise higher tax *for itself*,
it doesn't demand that the product of this is tax is shared among European countries. And Ireland, so far, say "no". After all, those circles are really pro-europeans, and really think "European". Also, en evidence is that if (2) was the main issue, you would expect a more anti-Irish discourse among the mainstream officials and the mainstream media in Europe. On the contrary, you see, with the Brexit, a very anti-british, pro-irelands discourse taking place, with the UK presented as an American Trojan horse in Europe -- while obviously this could applied to Ireland.

So you ask is this a French (or German, Italian vs Irish) treasury issue or an EU treasury issue, I would say it is more an EU treasury issue.

Indeed, there's no public animosity against Ireland. Not even Matteo Salvini or Marie Le Pen rail against Ireland.

Anyway, Tyler says " the debate is focusing on how little tax some of the major tech companies pay directly to the French treasury".

On the adjectives for the tax burden issue, Tyler did not worry about "optimal", he chose the more ambiguous "significant".

Again, not really. It is about the allocation of tax revenues in an IP-rich economy in which European companies have not generated nearly a proportionate share of the surplus generated by that IP compared to their consumption of it.

@ [*] delenda est.

Agreed, but there is a distinction to be made between America as in "state and federal governments in America" and as in "big tech multinationals based in America, aka GAFA". The distinction is often lost by pro-eruropean circles in Europe, because they are "nationalists at the level of Europe" rather than true "internationalists".

I believe all governments (and all people) in the developed world have a common interest in leveling the playing field by having compagnies in all fields of economy paying similar level of taxes. If, as it seems, big tech multinational compagnies have special schemes to pay even less taxes, ceteris paribus, than other multinational companies, and even more than smaller companies, I support efforts, by France, Europe, the US, OECD, or anyone, to block these schemes. Even though I have quite different reasons to support these efforts than those who currently implements them (for them, it seems to be an anti-American stance, "let's keep as much money we can in Europe from going to US companies or governments", for me it is "leveling the market playing field")

Indeed and a fair point. To that I would first state that the hypothesis that tech companies are undertaxed largely relates to some already-partly-fixed quirks of the US tax system and is in any case not very strongly supported by data.

But I agree that it is the kind of issue we should care about and investigate. The problem is that you are right that the EU's approach is merely about their share of the pie and not at all about that issue.

They didn’t build that. Or harvest the fruit, or do the work, but they want 2 slices anyway.

Thank you, Ted Kennedy.

Whilst that view is understandable, it is at least a simplification. Ireland cannot accept the tax without conceding that it was due, which would imply that the ruling granted by Ireland was, as the EU Commission alleges, a preferential sweetheart deal.

To recap the facts somewhat, Ireland accorded a medium-sized and largely anonymous company a transfer pricing arrangement based on the non-resident entity using Ireland for certain administrative services (practically speaking, a post office box for providing services within the EU). This was common practice in Ireland, but also similar practices were common in Belgium, the Netherlands, Luxembourg, etc.

The EU alleges that Ireland broke EU law in doing so by doing so in a discriminatory manner. The EU argument is very wide-reaching and literally unprecedented. Ireland has to fight it, because the EU argument implies that the EU Commission has direct executive authority over the administration of transfer pricing, i.e. that the EU Commission independent of the Member States is the competent authority to regulate transfer pricing, whereas the TFEU provides that direct (i.e. corporate) tax is subject to unanimous vote by the EU Member States.

Thank you for the response. I'm not sure what you are alleging. You are right about the effective tax rate, but as you know, this is not the tax rate.

Just for clarity, tax rates are an explicitly "reserved" power that the EU can only act on with unanimous vote. No tax rate as such can ever breach current EU law (except, ironically, if it was too high). What the EU is competent over is discrimination.

The EC's press release made this relevatory (and slightly surprising!) comment:

This selective tax treatment of Apple in Ireland is illegal under EU state aid rules, because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules. The Commission can order recovery of illegal state aid for a ten-year period preceding the Commission's first request for information in 2013. Ireland must now recover the unpaid taxes in Ireland from Apple for the years 2003 to 2014 of up to €13 billion, plus interest.

In fact, the tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market. This is due to Apple's decision to record all sales in Ireland rather than in the countries where the products were sold. This structure is however outside the remit of EU state aid control. If other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland.

To clarify:
- the word "selective" is there because it has to be. If the deal was not selective it could not breach EU law
- the reference to "a significant advantage" is there for the same reason. If Apple was not selectively given a significant advantage there would be no breach of EU law.
- the deal being attacked is not the rates which the EC cannot attack, nor even the ETR, but the selectivity of the deal
- the really nerdy bit is that the EC's argument rests upon a contention that the TP was wrong, in the sense that it was arbitrary, and that arbitrary is ipso facto selective. This is a crude vulgarisation of the legal issue actually at stake.
- the second paragraph gives the game away.

With respect, that is not the point about state aid. The point is what I stated above: selective advantage.

In the EC's mind that is undoubtedly so, but they are begging the question as to where those sales should be booked and eliding the question about what tax consequences flow from "booking".

In principle, under current law, if a company resident in country A sells books or anything else to a resident of country B, and sends them the goods, country B has no taxing rights (leaving aside customs and import VAT or possible sales taxes) on that transaction.

This is exactly what the OECD are proposing to change in the current rules, and what the digital services taxes so popular in Europe now get around.

A VAT is a business tax with zero tax dodges.

However, across borders, the only business taxed is the business that causes the production (GDP) to occur, the seller, who is imputed with all the labor costs, rents, normal profits behind the sale, and pay a business tax without tax dodges, like labor costs.

The reason for the producing nation not taxing this business is they gain all the welfare of paying workers, taxing wages, taxing profits and rents, without any of the welfare costs of putting money in the pockets of the buyers.

The issue with the Red America ideology of monopoly IP rent seeking is that its extracting rents using your example, from both nation A the producer, and nation B the consumer, without contributing anything to the welfare of either.

The flaw in the EU/French thinking, which isn't surprising given the French being big IP monopoly rent seekers, aka monopoly on regions, bacteria and yeast, and tradition, eg, champagne, a French regional IP monopoly, is that its easy to zero out rents on IP.

Eg, try as they might, France has no monopoly on champagne. At best they force US producers to invent French sounding names to go in front of sparkling wine, after a Trump style trade deal to extend IP monopolies globally.

Facebook and Google have a monopoly only because of Red America leaders like Trump fighting for IP monopoly.

And who rejects these global IP monopolies? China. Developing nations.

Facebook, Google, Twitter,...., have no global monopoly because China is Keynesian capitalist, and promotes building so much IP capital that rent seeking is impossible. In China there are two competitors for every Facebook, Google, Amazon, Twitter, helped politically by Chinese nationalism.

But, IP capital is built at low labor cost.

In contrast, the cost of the NBA IP is extremely high. China has yet to build the competing IP even though China has had basketball culture as long as the US, with more military support for basketball than in the US.

Basketball IP is based in labor. Players are trained and guided by former players for the most part. To control this IP, owners need to have lots of revenue, which requires lots of roaring crowds, which means paying lots of workers to build and operate massive stadiums, which require lots of public capital be built.

(Imagine football, baseball, etc championships played in studios with no crowds for video viewers. Imagine the video producers adding in crowd tracks to make boring blowout games "exciting". Without the actual paying customers sitting in the stands, sports would not make money selling video of the games.)

The NBA has a lot if IP represented by "NBA" but the IP can be copied freely. Globally, football has a lot of IP that makes it profitable and heavily consumed, except in the US. In the US, football competes with the competing NFL and AFL IP powerhouses. It's been good that neither is a monopoly. Each gets to innovate at the margins for a limited time until the other copies the good innovations.

Back to the EU. The EU is as economically powerful as China and India and thus able to promote more IP to compete and beat US IP like Google, Facebook, etc, with strong competitors.

Models are Airbus and Arianespace. Granted, they run afoul of free trade rules, but so does Boeing, with both the US and EU winning trade complaints so both can tax imports from each other.

Google has invested heavily in "freeware" developed in the EU and used it to gain market dominance in an EU developed market, unlocked smartphones, which are now manufactured in China. The EU could form a Linusgroup SA to develop cell phone software and apps in competition to Google's android that are tuned to linusgroup search, social media, etc services. Simply copy China.

Let Red Amerrica politicians living in Blue America attack the EU over IP theft of smart phone open source OS and the web invented at CERN.

I'm not in a position to opine one way or the other on most of your comment, but based on this sentence, I do know enough about VAT to know you don't :) :

A VAT is a business tax with zero tax dodges.

FYI: VAT evasion costs Europe an order of magnitude more than corporate tax evasion.

Almost but I think still not quite. It is about the EU's share of the pie vis-à-vis America (and increasingly but they don't really realise it yet, China and even South Korea), much more than the size of the pie.

Nothing particularly American about that, unfortunately.

The OECD proposal is to tax corporate income based primarily on the place where the corporation's sales occur. The tech tax in Europe has been put on hold pending consideration and refinement of the OECD proposal. Is this blog post by Cowen meant as an indirect endorsement of the OECD approach (as compared to the tech tax)?

Thoughts on all the big players pulling out of Facebook's Libra currency. Is the government scrutiny and hostility justified?

"tax incidence": one of the few economic concepts that the layman really should absorb.

If I were trying to explain the idea of tax incidence to a layman I wouldn't start with that example. But you would, I take it?

Pretty hard to know what you mean. "Illegal" is a relatively clearly-defined word. No-one alleges that FB's tax affairs are illegal: indeed this is why everyone is changing their rules, and not taking FB to court.

As for the concept of producers of data, well, that is a vexed issue. It has been suggested that the transaction between eg FB and its users should be subject to VAT analogously to barter transactions, for example. It can also be argued that the value is not the data but the tools that incite users to share it, its aggregation and the algorithms that decipher it (i.e. the famous "IP" generated in America).

Alternative Minimum Tax. If it's good enough for humans, it's good enough for the other kind of people.

Yes Facebook is being crushed by taxes, that's why they have $50bn cash on hand

"Let’s say you believe that Facebook has significant market power over the advertising market in France. That is not exactly my view, but let’s run with it — a competitiveness assumption will hardly boost the case for taxing Facebook."

So competition in the advertisement market would shift the burden of the Facebook specific tax to consumers? How?

Suppose there were perfect competition among advertisement platforms: Radio, TV, billboards, Google, Facebook.
That means that the price per (a measure of) "converted new consumer" for an ad should be the same in all platforms. Say, if a "TV ad" leads to 100 "new consumers" for a product, while a "Facebook ad" leads to 50 "new consumers", the TV ad should cost twice as much.
If there's now a 3% tax on Facebook ad revenue, but not on TV ad revenue, then Facebook would have to swallow the whole tax! No one would be willing to pay 51% of the price of a TV ad to get a FB ad, since it brings only half as much benefit!
Because of perfect competition, that tax would have no effect on the overall market, and so the price for a TV ad would stay constant, and so the price that a company pays for a FB ad would need to be constant as well.

What am I missing?

Except, Facebook is completely price inelastic and advertisers are highly price elastic.

Facebook's marginal cost is essentially $0, and it's alternative to running adverts is not running adverts. Advertisers are price sensitive, and they are indifferent to the platform they advertise on, so long as they produce sales. If the price of Facebook ads relative to non-digital platforms goes up, advertisers' spending will shift to the cheaper platform.

Ergo, the tax incidence will fall almost entirely on Facebook.

Which is almost the same as what I mentioned above. In perfect competition, consumer demand is perfectly elastic w.r.t. one company's prices as they can just go elsewhere.

As far as I can tell, Tyler is saying that one should think twice about tax incidence when a monopoly is present in a given sector, because a consumption tax will indirectly fall on the monopolist. It that meant to be an argument against driectly taxing monopolists? If so, it's not very convincing

"If so, it's not very convincing"

+1, I fail to see Tyler's point. Yes the "tax" on the monopolist will certainly be shifted. But a tax on any corporation in a highly competitive market is entirely paid by the customers of the corporation. Is there a substantial difference?

"But a tax on any corporation in a highly competitive market is entirely paid by the customers of the corporation"
Can you explain? If the tax is on a single corporation (in a competitive market), as I and Bob pointed out above, the burden should fall solely on that corporation. If Facebook tries to raise its (tax-included) prices, advertisers would merely move to other advertising platforms.

If you're the French tax authority, why do you care what the incidence of pre-existing taxes is? It's just about grabbing some cash out of the Facebook cookie jar. If there are monopoly rents left to tax, why do I care if I'm already taxing some (other) portion of the monopoly rent?

More generally, if you place low weight on Facebook's profits, what is the most efficient way to tax Facebook? Surely its a profit tax, up to the point where Facebook profit goes to zero - wouldn't that even be better than a VAT tax on whatever Facebook is selling, where the burden is split between Facebook and its customers?

In general a profits tax reduces welfare by reducing the incentives to produce profit-creating goods, i.e. capital. But in the case of Facebook, what is the marginal incentive effect of the French tax? Likely nothing, since FB would exist with or without its French business. In the extreme, FB might try to leave France to avoid the tax (and threaten others who entertain the idea of taxing FB too aggressively) but I suspect some French authorities might prefer that outcome!

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