It is becoming ever more obvious that for a country to succeed and be prosperous in the future, their economy will have to be technology driven. Technology is constantly evolving and working its way into more and more parts of our lives, and there is money in designing, building, and selling these tools and services.
The UK government has at least noticed this trend and is investing millions in technology clusters around the UK, most notably around “Silicon Roundabout” in East London. The EU too sees the value in total connectivity to drive growth and is both directly investing in broadband infrastructure and forcing ISPs to do the same. The future is digital.
One important aspect of this digital future that governments seem to continually ignore, however, is that a digital future also has few geographical boundaries. Certainly within free-trade zones like the EU, there will be no room for boundaries for digital products. There are, however, a few problems that lie ahead before we can embrace this future – the ugly subjects of licensing and tax.
The EU already offers a way to more simply apply for EU-wide patents, but this needs to be taken forward to include a single place to apply for a license for that patent, and even a single license to exploit copyright. The Hargreaves Report pushed for a single copyright exchange to make licensing easier and more dynamic in the UK, but this should be EU-wide. Why should we have a boundary for music streams, when there is no boundary for selling CDs? Lets remove these licensing complications from the equation, and let new entertainment businesses sink or swim online without needing an army of lawyers.
But the most problematic area that needs to be addressed is tax. There are huge variations in the tax systems around EU member states, but each country is forced to treat each company from those countries on a level playing field. This was a workable solution when the EU (or EC) was devised and it was normally a better idea to set up a company’s HQ in their main country of business due to the limitations of a physical world. The internet has changed the rules, and it is about time the EU put its foot down and stopped businesses shopping around for tax reasons.
Amazon is a great example of the problem (although they are far from alone – just a big household name). Amazon.co.uk generated sales of over £3.3 billion in 2011, but they sure as hell don’t pay tax like a company with those figures to HMRC – instead they work around paying much of a tax bill at all by basing themselves in Luxembourg. According to a recent piece in The Guardian, Amazon has generated over £7.6 billion in revenue from sales in the UK within the last three years but pays no corporation tax on those sales at all.
By basing the company (Amazon EU Sarl) in Luxembourg and having Amazon UK as just an “order fulfilment business”, they pretty much avoid UK corporation tax completely. Amazon’s UK business accounts for about half of its sales in Europe, but for 2010 Amazon claimed that is was the Luxembourg business that generated £6.5 billion in turnover with just 134 staff, with the UK business only generating just £147 million in turnover with 2,265 staff. It is pretty obvious that their UK sales are simply being shifted under the Amazon EU Sarl banner to skirt the issue of tax. By most accounts, had Amazon reported its UK sales as part of its Amazon UK turnover, then their yearly corporation tax bill to HMRC would be around £100 million – notably more than the £3 million in total they have paid over the last decade.
You cannot blame Amazon for making the most of the tax disparities in the EU, as by not doing so their directors would not be fulfilling their duty to shareholders – but we should close these loopholes so that the possibility to move business centre for tax efficiency within the EU is removed. It is the big economies of the EU which are losing out in the current tax run-around – with many US corporations such as Dell basing themselves in Ireland to sell products focused at the UK market, whilst avoiding the higher corporate tax bill a UK HQ would mean for the company. Smaller countries such as Luxembourg, Ireland, and others are swiping tax revenues from the countries in which the business is actually being performed – but the EU bans any country imposing protectionist taxes on imports from those countries to even things up. The situation also causes problems when huge home-grown corporations, such as Vodafone, can effectively bully the government to reduce their tax bill with the threat of moving the company HQ abroad for tax purposes.
The current situation is not viable. Either the EU needs to step in and make tax rates more universal across member states, or allow member states to impose taxes on imports of products from companies where they have chosen a location simply to work around the tax system of the country or countries in which they perform most of their business. Smaller countries are currently fighting to the bottom in offering international corporations lower and lower taxes in order to base themselves there, the result of which is simply meaning less tax taken from the corporations in general for use by the any state for social welfare or other projects, and more money going back to the ever richer class of super-wealthy share-holders – putting more of the tax burden on the middle classes. If a business wants to take advantage of the borderless EU, then that’s great – but they need to pay tax to the country where they do businesses, not just wealthy nation living of the tax takes of others.