Why Spain is pushing ahead with taxing large tech firms

A new Spanish tax (called the “Google” tax) aims to reduce the tax gap and could add $1.4 billion to the Spanish budget in 2019 alone

Spain is following France’s lead and is ready to force large tech firms to pay more taxes in the local markets they operate in.

The so-called “Google” tax promoted by France will become a reality in the shape of a 3% tax on large internet and technology firms.

The tax is looking to reduce the gap between what large companies pay in European countries and what they send back to their countries of origin (or never pay due to loopholes).

The proposal will reach the Spanish Parliament as soon as a new government is sworn in.

Targeting US giants

The new Spanish government led by Prime Minister Pedro Sanchez is determined to reduce the inequality by pushing ahead with the tax on large tech firms. The proposal includes a 3% tax on revenues generated from the services and products consumed by Spanish users.

The new tax will apply to companies with global revenues that exceed $850 million (£670 million) with at least $3 million coming from Spanish consumers. The regulation refers specifically to revenues from online platforms, online advertising, and sales of user data.

In its current form, the draft is targeting mainly the US giants Facebook, Amazon, Google, and Apple. Airbnb and Uber could also find themselves in a similar situation, however. These companies don’t have a significant physical presence in Spain, but they earn high returns from local customers thanks to a powerful digital presence.

A global solution for countering taxation gaps

The initiators of the proposed tax claim they’re solving a “global problem”, according to Nadia Calvino, the Spanish Minister of Economy.

Tech giants make billions in revenues thanks to their European customers, yet they pay next to nothing in most of the countries they register huge profits in. This is possible due to their strategy of keeping legal bases in EU states with lower tax rates.

US tech giants have been accused more than once of dodging taxes. However, according to the current laws, these companies aren’t doing anything illegal. Unethical perhaps, but still perfectly aligned with the legislation in place.

Most large tech firms have their headquarters in Ireland, a country that set its corporate tax rate at 12.5%. Furthermore, Irish law is very permissive with multinationals and allows them to pay taxes in the countries they manage their finances. In the case of Google or Amazon, for instance, this happens to be the Cayman Islands, which happens to be a tax haven.

Moreover, the most popular technology companies have become famous for moving profits between multiple subsidiary companies artificially. This method enables them to benefit from low tax rates.

In 2017, for example, Facebook contributed only 1% of sales as taxes in the UK – a far cry from the sums that other companies are required to pay. The situation is similar across other EU state members.

The proposed Spanish tax aims to put an end to these practices that keep millions of dollars from the country’s budget.

The Spanish tax model could become the EU norm

Spain isn’t the first country to adopt the 3% tax on large tech firms. In fact, the European Commission has been trying to push what it calls the “fairness” tax ever since last year. EU authorities are convinced that the impact this money could have on the local economies can no longer be ignored.

Until now, the only country that has passed the law is France, which made the tax on digital giants a top priority. The decision to introduce the 3% tax has already generated intense discussions between the White House and the French administration. US President Donald Trump even threatened France with reprisal tariffs on wine exports.

EU lawmakers deny any interest in slowing down Google, Facebook, or Amazon specifically. Analysts estimate that over 100 multinationals could be affected by the digital tax, from Europe, America, and Asia. The tax is part of a more extensive set of measures meant to “regulate” many areas within the online environment.

What’s next?

It’s the second time the government has tried to pass the digital tax after a failed attempt back in January. Now, Prime Minister Sanchez has a new opportunity to bring the issue to the table as he attempts to build a new government with a majority.

In fact, the government is counting on the digital tax, which had already been included in the draft for the 2019 budget.

The Spanish tax is still to be discussed in parliament over the next few weeks. However, if the law passes, Spain could earn as much as $1.4 billion this year alone from taxing large tech firms.

Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.

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