It appears that the UK and US are on a collision course over a digital tax after Washington threatened retaliatory tariffs if the British government did not back down on plans to impose the levy from April.The UK has drafted the legislation for the tax, which will be levied at 2 percent of revenues from UK users for companies that have more than £500 million in digital revenues worldwide and earn over £25 million from UK activities. They hope to raise almost £500 million a year and have included these revenues in public finance projections.
Not another trade war, surely? Bring in the washing!
The tax issue is a storm in a teacup which will fizzle out before it has begun. Just look at what happened when France recently planned to introduce a similar tax: Washington threatened to place tariffs on $2.4 billion of French goods, such as wine, as early as this month if Paris did not back down. Paris promptly retreated.
As UK Prime Minister Boris Johnson and his new government prepare for trade negotiations with Washington next month (after leaving the EU), the hope is of securing a fast-track deal. You can bet your next tax return that this tech levy will be the first item on the agenda when the two countries meet.
There are certainly issues to be addressed concerning the tax behaviors of US tech companies in Europe. But the elephant in the room is that Europe lacks the tech giants of its own which would allow it to compete with the US, and thus seeks to compensate through taxation.
What this tax spat truly reveals is the reality of the overwhelming power and competition gap between the US and Europe.
For many years, Europe has been more concerned with trying to knock down US tech companies than with building their own.
A good measure of how US tech giants are doing globally has always been the extent to which the EU dislikes them and targets them for anti-competitive behavior. So if anything, this latest drive is a compliment to California and Seattle.
Remember the decades-long pursuit of Microsoft, then Intel, and more recently Facebook, Google and Amazon? While the EU sought penalties and tighter regulations, the US tech giants innovated and increased their dominance. And even
China, a vastly poorer economy in terms of GDP per capita, was able to develop a number of global tech companies like Huawei and Alibaba in this period.
The lesson should be clear. Europe ought to stop worrying about Google or Amazon and instead investigate their own shortcomings. There are institutional, structural and cultural barriers to innovation in Europe. Rigid regulation and employment laws, institutionalized risk aversion and short-term investors are among the key differences that have kept Europe in an innovation straitjacket for decades.
Start-ups in Europe have until recently been all too eager to put a ‘for sale’ sign in the window upon launching. When they have shown signs of success, they have mostly been bought by US tech giants. What should be preoccupying European business leaders, governments and investors is how to encourage a clear vision and strategic plans to truly compete, thus builds longer-term investor and market confidence.
When the US regulators start investigating and filing suits against European technology companies for market dominance, that will be a measure of European success. If the proposed taxes on US tech giants prove one thing, it’s that logic and taxes are not good friends.