4 April 2019

Europe’s tech tax is just an attack on American firms

By Ryan Khurana

Europe’s relentless assault on American technology continues. The French government is rushing to effect a domestic “digital services tax” after months of unsuccessfully advocating its EU-wide adoption. The new three per cent revenue tax on earnings since January 1 2019 will only apply to around 30 online firms, hence it becoming known as a “GAFA” tax (after Google, Amazon, Facebook, and Apple – the tech companies most affected by the changes).

Proponents of the new tax claim it will bring about equity and fairness in online markets, but it is yet another example of the EU hitting back at American innovators. By focusing only on large companies with annual global revenues greater than €750 million ($848 million) and domestic French revenues greater than €25 million ($28 million), the new digital services tax misses out most European firms, as there are few successful online giants of this size across the continent.

The tax would transfer significant revenues from foreign firms to the French treasury, which can then be reinvested in the “champions” France is seeking to create. To interpret this tax as anything other than a protectionist measure to hurt American firms is to turn a blind eye to the evidence.

France is the third European country to domestically embrace the tax after Italy and Spain. Whenever the tax is discussed by European leaders, American companies are the exclusive targets of criticism. Attacking digital giants is just as much a motive behind the new tax as collecting revenue.

Some European governments, like Ireland, have criticised the EU-wide proposal for a digital tax. Ireland has managed to create a pro-innovation environment and has benefited tremendously from hosting US technology firms. Dublin argued that this new tax would redistribute money from places where innovation-friendly policies exist to countries where they are non-existent, harming Europe’s ability to create tech giants of its own. Indeed, it is no surprise that the taxation of digital services is most popular in the least technologically-advanced EU countries.

One of the major architects of the tax, French finance minister Bruno Le Maire, has often accused large technology companies of not paying enough tax. His track record, however, suggests a particular hostility to American firms in Europe. In the past, he has championed the European Commission’s excessive antitrust campaign against Google, only to turn against the Commission when it applied those same rules to European firms.

The French government, alongside their German counterparts, have proposed a rewrite of European competition policy after a rail mega-merger between European firms was blocked. The new rules would allow Europe to selectively exempt large firms from antitrust rules to create “industrial champions”, allowing them to compete against American and Chinese firms. Double standards in enforcement would allow countries to protect European technologies from outside competition. But this attempt to leverage antitrust for political gain has received much scorn from economists, and reveals the French government’s desire to put anti-American political priorities above innovation.

If it’s widely implemented in Europe, the digital tax is likely a model that other countries will adopt instead of encouraging innovation at home. Past European digital policy has already had a global impact, but the United States could challenge this latest negative development by providing alternative approaches. Should European regulations, standards, and tax policies become the norm around the world, American companies will suffer and governments will seek to extract more of the value created by American innovation.

Part of this will come from the US government developing new digital policies, such as federal data regulations that can serve as an alternative model to Europe. It also requires encouraging American innovation instead of hampering it and championing these policies abroad as strategies worth emulating. Leaving it to European politicians to set regulations for technology will ultimately harm American innovation and the world.

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Ryan Khurana is Executive Director of the Institute for Advancing Prosperity and a contributor for Young Voices.