In what may be Europe’s first such effort, President Francois Hollande’s government says it will look into changing laws next year that will block the ability of online companies to pay levies on French earnings in European countries with lower tax rates. The government is also weighing options for common European value-added taxes.
Taxing the digital sector like other industries could generate more than 500 million euros ($648 million) for the French state annually, enabling it to narrow its budget deficit, said Philippe Marini, a senator who heads the Senate Finance Committee. Countries across Europe, struggling to bolster government receipts to close budget gaps, are seeking to gather more taxes from companies that hitherto escaped close scrutiny.
“These evaded amounts have caught our attention, especially at a time when European countries are being asked to align their budgets,” Marini said at a Paris conference late last month.
French politicians, like their European counterparts, have stepped up efforts to go after Internet giants who they say collectively avoid paying hundreds of millions of euros in value-added and corporate taxes using loopholes in European Union laws and different tax regimes across the region.
Governments across Europe say existing tax rules have given multinational companies too much room for maneuver and should be changed. The U.K. and Germany this month called on the Group of 20 nations in Mexico to adopt new tax rules.
“Freedom of the Internet doesn’t mean a free-for-all,” French government spokeswoman Najat Vallaud-Belkacem said. “Tax rules have to apply to these businesses as well.”
In the U.K., lawmakers this month accused Google, Amazon.com Inc. and Starbucks Corp. (SBUX:US) of using complex accounting methods to reduce tax liabilities. During a Nov. 12 hearing, Margaret Hodge, chairwoman of the U.K. Public Accounts Committee, called the companies’ behavior “immoral.”
“There’s a serious issue around fiscal harmonization in Europe,” French Technology Minster Fleur Pellerin said today during a company visit. “There’s a will to change this in Europe but the timeline is too slow. France is in favor of accelerating the pace. Tax rules set at a time when commerce was physical are not appropriate anymore.”
Google, Apple, Amazon and Facebook Inc. collectively pay 100 times less tax than the 500 to 600 million euros they should yearly in France, Benoit Tabaka, former secretary-general of France’s Digital Council, told the Senate Economic Commission in January. He said the four companies collectively pay about 4 million euros in French corporate taxes on online revenue of between 2.2 billion euros and 2.5 billion euros.
The companies didn’t confirm the numbers. Tabaka left the Council in June to become a policy manager at Google in Paris.
Google -- 500 of whose 36,000 employees worldwide are in Paris -- maintains its European headquarters in Ireland. From there, it sells advertising across the region, including in France, which has some of Europe’s highest corporate and VAT rates. Ireland’s corporate tax of 12.5 percent, for instance, is less than half France’s 33.3 percent.
“Europe has a serious problem with fiscal competition, even unfair competition,” said Mathieu Plane, an economist at researcher OFCE in Paris. “We have yet to solve this major problem and the topic isn’t being negotiated enough.”
French officials say Google, Amazon (AMZN:US), Apple and Facebook are able to sell to French consumers while not paying the 19.6 percent French VAT. Instead, they pay lower rates in Luxembourg or Ireland, where their EU headquarters are.
A French Senate report cited a study showing that Google pays an effective tax rate of 2 percent to 3 percent.
“There’s a more general problem that applies to all multinationals, not just Internet companies, which is figuring out where margins and added value come from, and how they are created in a company’s commercial cycle,” said Sebastien de Mones, a tax lawyer at Bredin Prat in Paris. “That question becomes even touchier in the case of immaterial sales.”
That Google has more taxable commercial activity in France than it claims is “incontestable,” Budget Minister Jerome Cahuzac told reporters last week in Nanterre, outside Paris. Google, which doesn’t break down sales except to say it gets $16.3 billion -- or 43 percent of total revenue -- outside the U.S. and the U.K., says it is well within the law.
“We fully comply with tax laws in every country in which we operate and make significant contributions to the ecosystem through local payroll and corporate taxes,” a Google Paris official said in an e-mailed statement.
A Paris-based representative for Apple, which has its European headquarters in Cork, Ireland, declined to comment on its French taxes and revenue. The company sells most of the applications for its products through its online App Store.
Europe brings in $36.3 billion, or 23 percent of Apple’s sales (AAPL:US). It accounts for 24 percent of Apple’s operating income.
Amazon, which has its European headquarters in Luxembourg, says it pays all applicable European taxes. Facebook (FB:US), whose European base is in Dublin, said in a statement that it “takes its tax obligations very seriously,” adding that it ensures compliance with local laws.
Still, French tax authorities are stepping up raids on companies such as Google to more aggressively review operations.
Squeezing more out of Internet companies is a recurring theme in France. Former President Nicolas Sarkozy created the National Digital Council last year for matters including taxes, after accusing the companies of “fiscal dumping.”
The debate has become more heated under Hollande as the Socialist president, elected in May, seeks to reconcile stalled economic growth with a promise to cut the budget deficit to 3 percent of gross domestic product next year. Hollande’s 2013 blueprint relies on 20 billion euros in increased tax receipts.
Budgetary pressure increased after the European Commission, the EU’s executive arm, said on Nov. 7 that it’s afraid France won’t meet its 2013 target, forecasting a 3.5 percent deficit.
Phone companies, which invest in infrastructure needed to enable online sales, have asked the government to tax the Internet-linked groups to level the playing field.
“We’re surrounded by companies that barely create jobs in France, barely pay taxes and invest nothing on infrastructure,” said Pierre Louette, president of the French Telecommunications Federation and secretary-general of France Telecom.
Other digital industry players concur.
French companies “need a European market in which fiscal dumping does not go unpunished,” Jacques Antoine Granjon, founder of online retailer Vente-Privee, said today during a visit of the company’s headquarters with digital economy delegate minister Fleur Pellerin. “We need political conviction to make Europe more united, and that includes taxation.”
French phone companies have paid 23 billion euros in licences, state dividends and taxes -- excluding VAT -- between 2006 and 2011, according to the Federation.
“It may be tempting to hike taxes on companies that can’t take their business out of the country,” Stephane Richard, chief executive officer of France Telecom SA, said in an interview. “It would be healthier to target the companies that make money here but pay no taxes on it.”
Companies such as Google and Amazon are trying to show they want to give back more. Amazon yesterday said it plans to open a new distribution center in northern France, its fourth in the country, in the second half of next year, creating 2,500 jobs over three years. Late last year, Google opened a 107,000 square-feet sales and research space in the French capital.
Hollande, who last month hosted Google Chairman Eric Schmidt for a sit-down about taxes, jobs and investments, is planning a tax overhaul to address issues around so-called European tax evasion, according to a Finance Ministry official.
The plans stem from a report commissioned by Hollande’s government, to be unveiled next month, and will seek European and international coordination, the official said.
The Organisation for Economic Co-operation and Development (OECD), a group of 34 nations, is also weighing options after finance ministers at G-20 talks on Nov. 5 asked it to look at whether tax standards can be improved to prevent large global corporations from dodging tax obligations, albeit legally.
“We have huge pressure from states to move quickly -- the current rules are no longer adapted and countries need resources,” Pascal Saint-Amans, Paris-based director of the OECD, said in an interview. “We hope to see a change, not just proposals for a change, in the next 12 to 18 months.”
The OECD will hand draft proposals out to member states in January, with the goal of opening discussions at the February Moscow meeting of the G-20, Saint-Amans said.
“Governments are finally beginning to take note of the weight of the industry,” said the Telecommunication Federation’s Louette. “There are good reasons to take charge because unlike steelmaking or textiles, demand in our industry is actually growing.”
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