The Fear of Extra Revenue, Emerging Normal For Global Digital Firms

I have noted in the past that one way to handle excessive tax engineering by ICT utilities like Google, Facebook, Amazon and Apple will be to tax revenue and not profit. And you tax that revenue at the locality where it is earned. Though that is bad as it takes away the concept of intellectual property (IP), but that seems to be the only fair way, to balance excessive tax engineering and public pockets. Globalization, consolidation and unconstrained growth of these companies demand a radical new thinking to ensure societies have funds to deal with public needs. They cannot take all the revenue and yet not return money to the public as tax.

In Nigeria, for example, Uber Nigeria pays tax on profit to Nigeria only after Uber Nigeria has paid licensing fees on IP it has used to Uber X that holds the intellectual property. That Uber X is probably located somewhere in one tax haven.

Let us assume that Uber makes $100 in Nigeria. It can consider “$70” to be fees the Nigerian unit must pay the Uber Netherlands or Uber Ireland (usually the place they run the double dip, like double Irish before it was phased out). So, at the end, Uber could be making a profit of $1 in Nigeria. Then, the Nigerian government will get the tax based on that $1 profit. Doing that saves the company money as it has moved profit it could have paid Nigeria to a tax haven where no one will tax it.

Nigeria has an agency that manages this complicated IP and revenue issue. The agency is National Office for Technology Acquisition and Promotion (NOTAP). NOTAP has to approve many things before companies can repatriate funds back to their home countries or outside subsidiaries.

It has been the normal: move profits to tax haven. Digital companies have abused the tax flexibility. You have a situation where a company opens a post office address in one country to hold intellectual property used to operate in another country (the real or operating country) just to deprive the real country tax benefits. It hurts the real country and makes public finance unmanageable. The facilities have been used for the services, but the corporations are not bringing tax funds to support their maintenance. All the money saved via tax engineering goes to the companies, making already rich billionaires richer. That is not a roadmap for the future of the world, and that is why what EU is planning will be important.

From Reuters, France is attempting to persuade the EU to hike Google’s taxes. It will not be only Google. They will expand this to every digital business.  The French finance minister Bruno Le Maire will work to get other colleagues to  tax tech firms based on revenue, not profit. Historically, EU has taxed on profit, not revenue. This meeting will hold on  Saturday in Tallinn, Estonia.

Germany, Italy and Spain have already signed onto a French proposal that digital multinationals such as those two leading companies should be taxed in Europe based on their revenues, rather than only profits as at present.

Currently such companies are often taxed on profits booked by subsidiaries in low-tax countries like Ireland, even though the bulk of their sales comes from other EU countries….

Technical discussions would have to focus on defining how much revenue comes from a given country and what rate to use, a second ministry source said, suggesting that the rate would be of the order of several percentage points.

What This Will Mean

If this deal goes through, the following will happen:

• Revenue will be recognized in the “real or operating country”  where it happens. For example, in the case above, Uber will have gotten a revenue of $100 from Nigeria. The tax will be levied on that revenue, assuming that Nigeria implements the same tax structure
• The concept of licensing intellectual property (IP) will be muted. That means Google Nigeria will not have to pay license to Alphabet (yes. Google) to make money through Alphabet IPs which are used in Nigeria. The country will tax Google based on the revenue and Alphabet will be deprived of the IP licensing fees from its subsidiary in Nigeria
• Many countries will cut-off local subsidiaries and country operations. To avoid being local, Google may decide to close Google Nigeria, serving Nigeria from U.S. to avoid being classified as local. That way it does not have to pay for revenue which is generated from Nigeria. That means, many technology firms will have many countries served from their headquarters to avoid classifying revenue as being earned locally. This decision could be catastrophic for local jobs.
• Tax payment will be simplified but pursuit of revenue clouded. This is obvious when you tax revenue. For the profit-based taxation, you do not care how much your company spends to get that revenue, because it will deduct it pre-tax. (Sure, you do care because you need to keep expenses low. But I hope you get the argument.) But if you tax revenue, many things will change. The implication is that every digital company will fear revenue. Why? If you know that having extra 10 marketing staff will get you extra revenue and you cannot deduct the expenses from those extra manpower, you may think again as you pursue that growth.

All Together

It will be a very huge dislocation in global commerce to tax revenue and not profit. Taxing revenue will make companies afraid to pursue revenue by all means. It can hurt the world because innovation will be stifled. Also, the model of taxing revenue will also destroy the fundamental element of capitalism which is that IP has to be paid for. If you tax revenue without allowing the company to take money home to fund new ideas, very soon, it will lack motivation and resources to innovate.

Yet, global technology companies have not been fair. They need to understand that the world has changed. You cannot allow a post office box to make more profit than you make from a whole country. The fact that you do it is the very reason why this change is coming. Whether France/EU does it this year or not, the future is one that will tax revenue because innovation and AI (artificial intelligence) will keep many people out of work. Government needs more money to settle them to avoid a breakdown of the global order. As EU takes a look, I expect the African Union to also consider its options.

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