Fresh Takes

GAFA Tax: The Predictable Consequences of an Ineffective Law

Recently, Google announced a 2% increase in its advertising rates in France, following the introduction of a “GAFA tax” targeting several multinational digital corporations. This 3% surtax was implemented as a response to the criticism that the Web giants do not pay enough income tax compared to the volume of sales they generate. The idea of a tax covering all OECD countries is also currently under discussion.

Google, like any other company, wants to, and indeed must, make profits. If their profits are reduced by 3%, the company will try to recoup a portion of this. The cost of this surtax is therefore borne by Google’s customers, namely those businesses that want to advertise on the platform. Those companies will then in turn have to pass on these additional costs to their own customers, thus making them less competitive. The entire population, then, ends up bearing the cost of the tax. Incidentally, the same observation holds for numerous business taxes.

The justification given for this kind of surtax rests on the notion that the GAFA companies (Google, Apple, Facebook, and Amazon) do not pay as much income tax as other, more “traditional” brick-and-mortar businesses that operate primarily in a single country. Indeed, in the European Union, they pay 9.5% versus 23.3% for traditional businesses. The GAFA companies can pay less income tax by locating their headquarters in countries like Ireland and Luxembourg, which have very low tax rates. They thus benefit from the free trade that exists between the different EU countries.

One of the factors that could bridge this income tax rate gap would be a complete overhaul of EU rules. But such tax reform could lead the GAFA companies to leave Europe, having lost any interest in maintaining a head office in the European Union, a move which would penalize the countries where they are currently located. The opposition of certain member countries to any European tax is therefore easy to understand.

These surtaxes on digital giants are detrimental to many European countries; they would be harmful in Canada as well. It is all of us, as consumers, who would end up footing the bill.

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