French Internet Tax Should Have U.S. Web Giants Very Worried

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A proposed French Internet tax is just the latest sign of an increasing desire among the major European Union economies to do more to force the big U.S. tech companies to pay their "fair share" of taxes.

The French Internet tax, an option proposed in a 150-page report released last week, would attempt to tax the collection of personal data. It's directed at such U.S. tech titans as Google Inc. (Nasdaq: GOOG), Amazon.com Inc. (Nasdaq: AMZN), Facebook Inc. (NYSE: FB) and Apple Inc. (Nasdaq: AAPL).

All four companies collect massive amounts of personal data. Google collects information via its free search engine; Facebook, through the activities of users on its social network. Amazon and Apple collect

credit card data and customer habits via their retail operations.

"We want to work to ensure that Europe is not a tax haven for a certain number of Internet giants," France's digital economy minister, Fleur Pellerin, told reporters in Paris last Friday.

The Controversy Around the French Internet Tax

The Internet tax issue has gained traction over the past year with the European debt crisis straining national budgets. Officials also say it's unfair that local companies competing with the tech giants are paying far more in taxes.

So now, making the system more fair and capturing what some consider "lost" revenue have become priorities not just in France, but in Germany and Britain as well.

Last year the British and German finance ministers held a news conference in which they called for international cooperation on making big multinationals "pay the taxes we expect them to pay."

Google generates about $2 billion annually in revenue in France, but pays no taxes. Google had 2011 revenue of $4 billion in Britain, but paid just $9.5 million in taxes.

Amazon reported $11.6 billion from its European operations in 2011, but paid just $10.7 million in taxes.

Years of discontent over the ability of many U.S. companies, but particularly the tech giants, to dodge the bulk of EU taxes started to boil over last year.

In addition to the study released last week, in November France demanded that Amazon pay $252 million in back taxes, interest and penalties; Amazon is contesting the claim.

French news reports have claimed its government is seeking over $2 billion in back taxes from Google, although Google says it hasn't received any such request.

France is also seeking a way to tax Web-based companies like Google on their use of Internet bandwidth.

"In coming years, with the arrival of connected TV, Google TV, Apple TV and Amazon TV, there's going to be more and more massive bandwidth consumption, and the question is who will pay for the necessary investments," Pellerin told The Wall Street Journal earlier this month. "It's a question that should be asked with insistence."

And today (Thursday) British Prime Minister David Cameron, who becomes chairman of the G8 group of leading industrial nations this year, delivered a warning to global companies using loopholes to reduce their tax burden.

"Any businesses who think that they can carry on dodging that fair share, or that they can keep on selling to the UK and setting up ever-more complex tax arrangements abroad to squeeze their tax bill right down - well, they need to wake up and smell the coffee, because the public who buy from them have had enough," Cameron said.

Would French Internet Tax Sap Profits?

Some would say the anger at the U.S. Web giants is misdirected, as they are merely taking advantage of loopholes built into EU laws.

Many non-European companies set up headquarters in low-tax countries such as Ireland or Luxembourg and rout their European profits through them.

But with European finance ministers sounding increasingly determined to go after these profits either with new taxes or by closing loopholes, U.S. tech companies would face a major hit to their bottom lines.

While it's impossible to estimate exact numbers without knowing exactly what EU politicians will do, it is clear that companies with billions in European profits could end up paying hundreds of millions of dollars in additional taxes each year.

Such an outcome would not bode well for the stock prices of Apple, Google, Amazon and Facebook, or for many other U.S. multinationals that use the loopholes, such as Starbucks Corp. (Nasdaq: SBUX).

The French Internet tax is likely just the first salvo of many aimed at making U.S. multinationals pay what Europeans see as their fair share.

"It's not a crusade against Americans," Pellerin told The New York Times earlier this month. "We are just trying to put everyone on a level playing field."

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