Finding a solution to the abuse of transfer-pricing by global internet companies

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The abuse of transfer-pricing by global internet companies, to move profits from where a transaction has actually taken place to a low-tax jurisdiction where some "super-valuable" intellectual property is said to reside (despite there being few staff based there to develop or maintain it) has been allowed to develop because tax authorities haven't challenged it. Those authorities could either now get off their backsides and do their job, or tax revenue instead. If a French advert is shown to a French consumer in France, it is hard to argue that the resulting revenue was generated in Ireland, where tax rates are much lower.

This could become an incentive to correct transfer-pricing: the revenue tax only applies if the proportion of a company's global taxable profits asserted to be earned in France is wildly different to the proportion of global revenue generated there. So, if France accounts for 5% of Google's global revenue but less than 1% of taxable profits, the sales tax applies. I suspect this would see a rapid adjustment in transfer pricing.

Some argue that France (or the UK) cannot afford to lose the internet giants. That's wrong. These are not global companies: they are US companies that succeeded in Europe, failed in China and are trying to develop a business in India. Everything else is too small to be relevant. They won't withdraw from lucrative markets like France, Germany or the UK, as they would see sudden declines in revenue and profits. These companies feel obliged to play the game of tax avoidance because some of their shareholders demand it, and they play within the (current) rules. If the rules are now tightened up, Google, Facebook, Amazon et al will abide by them. They may even be relieved to do so - as an ex-corporate tax consultant I know that international tax planning is time-consuming, expensive and distorts business decisions. Straighten out the tax incentives and let everyone get on with managing their businesses. 

Incidentally, this would increase tax take for the US as well - that is where the intellectual property actually resides, so that is where the benefits would end up being (highly) taxed. Someone tell Mr Trump.

 

William de Gale is the manager of the BlueBox Technology Fund