The European Union and the GAFA issue

For a couple of years now, a lot has been heard about how the European Union was sanctioning both Tech giants from the Silicon Valley and European Union member states which did not compel these companies to pay overdue corporate taxes back to them. More precisely, these cases have mainly been undertaken since Margrethe Vestager, a Danish politician, took the seat of European Commissioner for Competition in 2014. As she took office, she indeed began to impose record sanctions on several American IT enterprises such as Google, Amazon or Apple. This was often the result of these firms defaulting on paying their taxes to the country they established in. Massive fines have been ordained as Vestager ruled they did not respect European competition laws. She also started to condemn particular member states for not requiring these companies to pay back what was due to them, and therefore to the European Union. In any case, the Commissioner’s work has led to an extensive press coverage from both sides of the Atlantic Ocean, either being praised or highly criticized by medias and observers. Some have highlighted her strength for defying the most profitable multinational companies (MNCs) in the world, while others underline the negative side effects this sanctioning behaviour could have on the EU’s economy. Both sides present legitimate arguments and deserve to be investigated.

Why do these companies seem especially targeted by the European Commissioner?

First and foremost, a few things must be specified in order to fully comprehend what is at stake when it comes to these cases of overdue corporate taxes. The most important one is the idea that is encompassed within the term “Gafa”, which is currently very commonly used in Europe, while almost unknown in North America. The expression refers to the four biggest high-tech companies, Google, Amazon, Facebook and Apple. It is a rather important terminology to adopt here, because the term has been coined to reflect the fact that these four firms are especially on the EU’s radar, while others seem to be treated with more indulgence. Therefore, when one makes a reference to the Gafa and the European Union, it usually represents the struggle between the American Tech giants and the European Commission, and more notably with the European Commissioner to Competition, Margrethe Vestager.

The Gafa has been a very divisive expression over which Europeans and North Americans, to speak in the broadest terms, have had some disagreements. Indeed, while numerous US observers frequently feel as if the European Union was knowingly and purposely only targeting US-based firms, the European Commission has always maintained it was not its aim to do any harm to the American Tech industry. However, when looking at the latest penalties imposed by the Commissioner, it indeed seems like Silicon Valley’s most significant companies have particularly been aimed at during the last few years. To refute these allegations, the Commission’s line of defence strove to prove that these enterprises were benefiting from a special treatment while other firms had to pay corporate taxes. In the words of Commissioner Vestager, talking about the Luxembourg case:

“Luxembourg gave illegal tax benefits to Amazon. As a result, almost three quarters of Amazon’s profits were not taxed. In other words, Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules. This is illegal under EU State aid rules. Member States cannot give selective tax benefits to multinational groups that are not available to others”.

The Commission thus claims some EU member states, such as Ireland and Luxembourg, treat the four Gafa companies differently than they do with other firms, then legitimating the sanctions that have been attributed to them. The American counterclaim promulgates another side of the story, which states that the European Tech industry has not witnessed the same success its US counterparts did. This would be the main explanation for understanding the European relentless unfairness toward the Gafa. This opinion was shared by several US economic observers as well as the Obama administration.

Another explanation could be put forward to read into this European “unfairness” toward the Gafa. In fact, as the EU currently seeks to reinforce cybersecurity within the EU’s borders, and to enhance the protection of EU citizens’ private data, it appears that these big high-tech firms could represent quite an impediment to the setting up of this strategy. This is also part of the Commission’s wish to develop a European Digital Single Market (DSM). Cybersecurity and data protection will indeed have to be swiftly and efficiently implemented at the level of the EU in order for the Commission to establish the DSM, which should technically bring numerous positive externalities to the EU’s economy (For more information, see The European Digital Single Market). Nevertheless, when considering this European initiative, the Gafa and their tremendous stocks of personal data might constitute a hindrance to the EU’s plan for improving cybersecurity and citizen’s data protection.

Broadly speaking, the underlying idea behind the Gafa collecting personal data is a sheer economic one. These companies actually thrive on acquiring more and more personal data, which could represent anything, from a person sharing a post on Facebook to a Google search or an Amazon purchase. When one of these firms get new data about someone, they use it to develop new products to attract potential and previous clients, or generate advertisements which target a very specific range of individuals who want to obtain a very specific good. Nowadays, these data are worth billions, and are mostly possessed by Google, Apple, Facebook or Amazon. Consequently, the EU Commission might consider that these Tech giants would hinder its cyber strategy, because they hold such a large portion of all EU citizens’ personal data.

Then, the struggle that has arisen between the EU and the Silicon Valley’s firms has particularly translated into corporate tax unsettlements which led the EU Commission to impose huge fines on these companies.

The corporate tax issue explained

As previously stated, the Gafa have been sanctioned by the EU Commissioner for Competition, Margrethe Vestager, through the use of rather harsh fines. These penalties are the result of what the EU believes is an infraction to the European state aid policy and a violation of the European Single Market anti-dumping rules. The issue actually lies in the fact that some countries, in the eyes of the EU Commission, are performing preferential treatments toward Amazon and Apple for instance. This means that rather than paying the full extent of their due taxes to these countries, the Gafa are in fact only paying a fraction of what they owe them. This allowed Amazon, for example, to pay “four times less tax than other local companies subject to the same national tax rules”, in the words of Commissioner Vestager. But there is actually a good reason why these countries, like Ireland and Luxembourg only to mention them, would permit the Gafa to pay a minimal amount of taxes, and that reason is related to the previously mentioned breaking of the Single Market anti-dumping rules.

Indeed, the whole idea behind this kind of behaviour is to attract and to bring foreign companies which need a suitable location for their headquarters into establishing in the country which applies this low taxation. Doing so enables the state using fiscal dumping to be guaranteed the company is going to set up its head offices for the whole geographical region on its land. This company will likely bring with it a lot of positive spillover effects, therefore making it interesting for countries to acquire such headquarters. Consequently, Ireland and Luxembourg, which indeed host Apple and Amazon’s headquarters for Europe, have succeeded. However, even though the European Union cannot sanction these countries on the ground that their corporate tax rates are too low – because a fiscal union is not yet established – it can still penalize them by dealing with this as an unfair competition and state aid issue, where it does have jurisdiction.

On this ground, the EU Commissioner for Competition has thus ruled in 2016 that Apple would have to pay a €13bn fine, which would constitute what it owes in terms of unsettled taxes to Ireland. The same way, on October 2017 Margrethe Vestager ruled against Amazon and its small €250 millions of unsettled taxes which it will have to pay back to Luxembourg. Right after announcing her ruling on the Luxembourg case, she stated:

“I hope that both decisions are seen as a message that companies must pay their fair share of taxes, as the huge majority of companies do,” and added again that “member states cannot give selective tax benefits to multinational groups that are not available to others”.

While both countries claimed they would respect the Commissioner’s decisions, they also affirmed they did not understand these rulings, and did not think they were doing anything wrong or breaking any of the EU’s rules against state aid. An Amazon spokesperson stated:

“We believe that Amazon did not receive any special treatment from Luxembourg and that we paid tax in full accordance with both Luxembourg and international tax law”.

In another case, the EU Commission sanctioned the firm Google, which belongs to a parent company named Alphabet, to pay a €2.4bn fine. This has been the consequence of Commissioner Vestager’s belief that Google was transgressing the unfair competition rule by favouring its own shopping website when people would look up a product using Google’s search engine. Even if this case may seem unrelated to the two previous ones, commentators have actually made no distinction between them, judging that it was also part of the EU’s “crusade” against American-based Tech companies. As for Facebook, it has not been spared too. The Commission decided that Facebook’s handling of its users’ data was indeed inappropriate and was considered a violation of their privacy. This can again be linked with the Commission’s plan for more cybersecurity within the European Union, and for a better protection of citizens’ private data. All four firms encompassed within the term Gafa have therefore been targeted by the EU, and even though the causes might have differed for sanctioning them, it does feel as if the Commission was especially aiming its scope at the Gafa.

One counterargument against this last statement could be that these firms have actually not been the only ones to undergo such penalties. In fact, the countries which have been hosting the Gafa and have used fiscal dumping, e.g. Luxembourg and Ireland, also faced charges from the EU Commissioner for Competition. First of all, in the Irish case, both Apple and Ireland appealed the Commissioner’s ruling to the European Court, expecting a revision of the decision. They found no support from the side of the Court and Apple thus had to pay the due sum of money to the Irish government. However, the Commission had to engage in judicial proceedings against Ireland, as it considered the country was taking too long to collect the taxes from the high-tech firm. The Commissioner invoked the unfair competition and state aid rules again to sue the EU member state, and indicated she wanted the tax recoveries to be as swift and efficient as possible. The other case involving both Luxembourg and Amazon is still very recent, but the two parties also indicated their willingness to appeal the ruling if they felt they had not broken any EU rules. They are currently reviewing the charges raised against them, but a judicial settlement will likely be used in this case too.

After examining the details of the cases which involved the Gafa and their host countries, it might indeed feel like there is a tendency from the EU – and more precisely the EU Commission and the Commissioner for Competition Vestager – to penalize these US firms. The EU is defending its positioning that it is not willingly and only targeting these companies, and both the EU and its member states have proposed more regulations of Tech giants, no matter where they are from, to better frame this rather recent kind of company.

How does the EU want to regulate high-tech companies?

For the moment, a fiscal union is not yet established at the level of the European Union, so there are no common fiscal policies and therefore no common tax rates. This did not prevent all the finance ministers to meet up for an informal council of ministers which occurred mid-September 2017. The goal of this informal get-together was to discuss and possibly propose reform ideas on how to prevent not only the Gafa but other actors of the digital and Internet economy to circumvent paying taxes. Several proposals have been made, but the main idea would be to create a kind of taxation which would be related to what is called the “digital presence” of these firms. Under this expression lies a particular concept, which could be summed up as taxing the digital actors by considering the number of their users and no longer on their profits. This would be a major switch in the way these enterprises would be taxed, because they would be forced to pay the taxes in each country and according to the number of their users, and no longer on their profits for a particular geographical region. This would mean that even though their headquarters are localised in a country which they know would not impose as much taxes as others, they would have to pay the same amount of taxes as if they were in another country which does not use fiscal dumping. In order to be adopted, this proposal will have to go through the European Parliament, but it has already been decided that a proposal should be made by December in front of the Economic and Monetary Affairs Committee of the EU Parliament.

However, if this proposal is ever implemented, it could generate issues among EU member states which still will not have a unified fiscal system. In fact, EU countries have their very own fiscal framework, and very often they have signed bilateral treaties and agreements with other countries which are not part of the EU. As a fiscal union is not unifying all fiscal systems, these treaties would have to be renegotiated at the level of the European Union, which could take years to accomplish. And if these agreements are not renegotiated, it would lead to disparities between the EU country which signed the bilateral agreement and the other party. That would be considered illegal when taking into account international fiscal laws.

In addition to this EU initiative, at the state levels there have been some proposals made as well for reforming the taxation of high-tech companies. For instance, the French Minister of the Economy and Financial Affairs Bruno Lemaire presented his own proposal for ensuring that the digital economy would be properly taxed. His proposal has actually been the one which the other finance ministers chose to adopt as a common positioning for the EU, but other national propositions have been put forward. Mr. Lemaire said:

« We propose to use as a basis of reference the turnover of these large groups, to set a level of taxation and to ensure that these large groups pay what they must pay to the public treasuries of the countries where they make profits ».

The reason behind this proposal being retained may be explained by the fact that France has always been a leading figure in the fight against tax optimisation practices, and has always called for the proper taxation of the Gafa.

It appears the European Union wants to deal with the Gafa issue as a unified bloc, but some problems remain, especially caused by the disruptions between all the national taxation systems. Furthermore, some economic issues might also stem from the way the Union seeks to tackle the Gafa dispute, and by the way Commissioner Vestager has been sanctioning them.

Penalizing the digital actors: a threat to the EU’s competitiveness?

While sanctioning big companies that appear to be benefiting from fiscal dumping and overhauling the tax system seem like more than legitimate causes, doing so might also bring along some negative economic outcomes for the EU. Indeed, first of all, taxing and fining especially high-tech giants such as the Gafa could lead the European Single Market to become a place where firms producing “physical” products would benefit from an economic advantage over the digital sector. This could endanger the principle of free competition which resides within the Union’s legislations, because a particular kind of company is here targeted while others seem to be out of the EU’s sights.

Secondly, when the Commission penalizes the Gafa, it sends a message to the rest of the private actors which are part of the digital sphere, that it might become more difficult to do business here. This has actually been part of the concerns EU officials and experts have had since Commissioner Vestager started to fine Google, Amazon and others. For instance, John Cassels, the head of a competition, regulatory, and trade group at a UK-based law firm called Fieldfisher pointed out that “Europe has to be careful that it doesn’t start being seen as a place where it is made difficult to do business”. He added:

“Technology is moving so fast and has the potential to bring so many consumer benefits … It’s like trying to hold back the sea — they may be able to do it for a while, but it’ll do more harm than good in many instances”.

Thus, even though there is a need for changing the way the big Internet companies are being taxed, increasing taxes too much might become counterproductive.

After reviewing them, it seems that the cases involving the Gafa and the EU Commission have not entirely been settled. In fact, there remains a lack of understanding between the EU and some member states over this specific issue, and especially states which have been under the EU’s radar such as Ireland and Luxembourg. Finally, while other EU countries have been pushing for a new way to deal with the Gafa and for the taxing of high-tech firms, it is going to be a very thorough and careful process to reflect upon if the European Union still wants to attract foreign firms into the Single Market.

Raphaël Moncada

For further information:

Afterdawn: http://www.afterdawn.com/news/article.cfm/2017/10/07/eu-to-sue-ireland-for-billions-in-apple-taxes

Business Newsfactor: http://business.newsfactor.com/story.xhtml?story_id=021001R8UKEC

DG Competition Cases: http://ec.europa.eu/competition/state_aid/tax_rulings/index_en.html

European Commission Press Release: http://europa.eu/rapid/press-release_IP-17-3702_en.htm

European Commission Statement: http://europa.eu/rapid/press-release_STATEMENT-17-3714_en.htm

Irish case: http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_SA_38373

Lexology: https://www.lexology.com/library/detail.aspx?g=654a486f-166f-4f71-b7c0-48b6ccbf22f4

Luxembourg case: http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_SA_38944

Market Realist: http://marketrealist.com/2017/10/why-eu-is-now-targeting-amazon-over-back-taxes/

Phys: https://phys.org/news/2017-10-eu-vestager-silicon-valley-nemesis.html