The FAANG companies — Facebook, Amazon, Apple, Netflix, and Google — have long faced scrutiny on taxes internationally. These extremely successful and profitable American firms are perceived to pay a disproportionately low share of taxes compared to the economic impact their entry into foreign markets engenders.
The story for foreign governments is: Facebook and Google, for example, have disrupted local advertising markets, taking customers and revenues from local providers — frequently large media firms operating in print, audio, and video. Local firms become less profitable, reducing local tax revenues along with governments’ capacity for financing local content creation. Similarly, international streaming (e.g., Netflix) and e-commerce (e.g., Amazon) firms can escape liability for local sales and value-added taxes because billing takes place outside the jurisdiction where consumption happens. The American firms enjoy a taxation arbitrage competitive advantage, again to the detriment of local firms and tax coffers.
While the FAANG companies are not the only ones potentially taking advantage of jurisdictional loopholes, their size and profitability puts them in the crosshairs of local policymakers and enforcement agencies. Despite considerable effort by international groups such as the G20 and the Organisation for Economic Co-operation and Development, this agenda is not moving fast enough for some countries. Here’s a look at some of the international responses.
Australia and New Zealand
Australia was one of the first countries to go it alone in 2015 when Treasurer Joe Hockey announced the “Netflix tax,” imposing an obligation on foreign firms distributing digital content to Australians to pay a 10 percent goods and services tax (GST). New Zealand followed a year later with a similar 15 percent tax.
moves were likely of great political significance locally, their impact is
difficult to measure. If the affected companies are not trading via locally incorporated
entities, then the obligation to report local transactions — and thus the
ability for tax authorities to calculate local GST liabilities — simply does
not exist. While firms such as Apple and Netflix agreed to cooperate, the sums
paid rely on unverifiable self-reported data.
However, paying taxes does not appear to have softened criticisms. Rather, the agenda has shifted from taxation to antitrust — as evidenced in the Australian Competition and Consumer Commission’s 2019 inquiry into digital advertising markets, and subsequent imposition of a mandatory code of conduct to govern all relationships between digital platforms and media businesses. Current Treasurer Josh Frydenberg asserted that for tax policy at least, Australia is now squarely back in the international consensus tent.
France has long been a leading advocate for taxes and action in response to perceived FAANG transgressions. The international rules allowing firms to funnel sales by local subsidiaries to their regional or international headquarters are of specific interest here, as the headquarters are strategically located in low-tax jurisdictions such as Ireland. Following a recent audit, the French tax authority levied back taxes of over €100 million on Facebook related to its handling of ad revenues between 2009 and 2018.
In 2019, France became the first European country to pass legislation imposing a 3 percent digital services tax (DST). It has been estimated the DST will apply to 30 companies and raise around €500 million a year. Several other European countries have followed or indicated they will follow France’s lead: Austria (5 percent); Belgium (5 percent); the Czech Republic (7 percent); Hungary, Italy, Poland, and Spain (3 percent); and the UK (2 percent).
British Finance Minister Rishi Sunak introduced the UK legislation, effective April 2020, citing frustration at the slowness of international collaborations. It was expected to raise about 500 million pounds annually. However, it was reported this week that the minister was planning to drop the tax, as it was becoming an impediment to a post-Brexit bilateral trade deal between the UK and the US.
An Asian approach?
move (if true) suggests that the way forward in an increasingly nationalistic
world will be addressing FAANG revenues as a matter of international trade and
not tax policy.
By way of illustration, Apple has been under investigation by the Korea Fair Trade Commission (KFTC) over allegations that it acted anticompetitively by forcing mobile carriers to pay for advertising and warranty repairs. In negotiations with the KFTC, Apple — a major rival of Korean multinational Samsung — has agreed to fix its “unfair” terms and avoid further action by paying 100 billion Korean won, which will support research and development, education, and discounts for consumers. “The regulator will close the case without concluding whether Apple did anything illegal if it finds the proposed remedies reasonable after collecting public opinion,” according to Reuters.
It appears that now more than ever, the FAANG firms will get drawn into geopolitical agendas in which trade deals may offer the only tractable resolution.