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The End of Nation States? Part 3: The Taxation and Local Influence of Meta-Platforms

BLOG - 26 February 2019

In a first post, we discussed the ways in which the digital revolution induces shifts in sovereignty, thus creating new centres of power alongside nation states. In a second article, we assessed meta-platforms’ ability to address issues of common good in the place of states. In this third section, Gilles Babinet, our expert on digital issues, analyzes and emphasizes the significance of the weapons meta-platforms have at their disposal (tax optimization, social optimization and influence).

From an economic point of view, digital meta-platforms follow new rules that are incompatible with those governing the traditional economy. Once they reach a critical size, the increasing yields specific to the digital world provide them with an unparalleled level of domination, thus protecting them from competition. Beyond this threshold, impressive results can be observed: Google has an operating margin of 23%, Apple 27%, while Amazon has tripled its earnings in just 12 months. Very few traditional companies of this size in the world can match these figures.

These profits are largely isolated from taxes thanks to complex fiscal mechanisms, favored in particular by the virtualization of these companies’ activities.

There is nothing wrong with that, except that these profits are largely isolated from taxes thanks to complex fiscal mechanisms, favored in particular by the virtualization of these companies’ activities. Thus, several of these meta-platforms market their advertising in France from Ireland, where their European headquarters are located, the latter serving as a bedrock for taxation on profits. However, Ireland's corporate tax rate is one of the lowest in Europe. This is only one of the many optimization schemes these actors employ.

European Commission calculations show that the corporate income tax paid by meta-platforms is around 9%, compared to 23% for players of the traditional economy. As a result, some countries, including France, are trying to introduce a first layer of turnover taxation, pending a more structured framework within the European Union or the OECD. Nevertheless, the current situation creates asymmetrical power relationships. Indeed, on the one hand, we have these increasingly wealthy companies, which are able to invest in innovation and new services. On the other, we have states, whose share of the revenues generated by the corporate income tax in their total revenues decreases every year, as they struggle both to finance and acquire digital expertise. As a result, the latter are becoming more and more technologically outdated. What is more, digital technologies are also generating a brain drain, as the talents who previously worked in the traditional economy and public institutions now work in these technology companies, thus reinforcing the downgrading of traditional players.

Local influence

At the local level, the aggregate power of digital companies is such that they are redesigning the social and urban context. In San Francisco, rental prices are estimated to have risen by 75% since 2011, almost exclusively due to the influx of talent required to develop technology companies. This has also had a major impact on the gentrification of an area that now extends over 190 km from San Jose to Sacramento: the price of a nanny, of a hotel room or even of domestic work is often multiplied by two, sometimes three, which has led to the eviction of the working classes. Business key money has rotated significantly, giving way to chic locations for new customers coming from technology companies. On the occasion of the recent election of the San Francisco mayor, a debate emerged around the tech ecosystem’s ability to influence urban policy, which is considered too favorable to these actors. Many tax exemptions and regulatory developments side with technology companies, to the point where groups of voters believe that regulations give too many advantages to these organizations. The new mayor was not spared by this debate, as her election was largely financed by the leaders of the great technology companies.

It is true that these companies have been able, over the years, to create urban and social contexts that particularly benefit them. Rather than using public services and contributing to their financing, they have repeatedly preferred to equip themselves with their own transport systems, restaurants, cafeterias - and even social systems and general services (laundry, domestic work, etc.). All this using existing infrastructure. Thus, bus lines transport these companies’ employees, using the transport infrastructure and contributing marginally to their financing, at least until an agreement is finally reached with the municipality to set up a minimum contribution.

Rather than using public services and contributing to their financing, they have repeatedly preferred to equip themselves with their own transport systems, restaurants, cafeterias - and even social systems and general services (laundry, domestic work, etc.).

For its part, Amazon did not hesitate to launch a competition between 238 cities in order to choose the location that would offer the best economic and social conditions for the establishment of its future "HQ2" headquarters. The company required that competitors sign confidentiality agreements preventing voters from knowing the extent of the concessions being considered by each municipality! The expected influx of 50,000 highly skilled workers probably means that the policies of the welcoming cities (New York and Arlington) will largely be under Amazon's control in the coming decades. The urban, social and economic regulations that apply to these two cities will have been modified to allow a player to establish itself, in line with what happened in California. New York State Senator Michael Gianaris did not hesitate to declare that "Amazon duped New York into offering unprecedented amounts of tax dollars to one of the wealthiest companies on Earth [...]. It is unfathomable that we would sign a $3 billion check to Amazon in the face of these challenges." This situation, while it might seem absurd, is not unique: Apple, for example, benefited from an exceptional tax status in Ireland, subsequently denounced by the European Commission, which would allegedly have allowed the company to deduct $13 billion over 10 years.  

The inevitable question is whether it is still possible to resist these economic pressures. Because meta-platform activism is a battle fought on many fronts. Thus, among Brussels institutions, it even surprises lobbying firms, which are used to seeing economic actors gradually transferring their activities to the Belgian capital as they build an integrated European market. Companies like Uber and Facebook did not hesitate to respectively recruit a former European Digital Commissioner (Neelie Kroes) as a public affairs advisor and a former British Deputy Prime Minister (Nick Clegg), by offering them extraordinary salaries ($4 million for Nick Clegg), thus greatly simplifying the defence of their interests. Need we remind the reader that Facebook engaged in an aggressive strategy of influence to respond to the charges it faces, with the support of a public relations firm, earning the company a vitriolic article from The New York Times

In a fourth and final post, we will formulate different hypotheses regarding the ways in which the post-Westphalian world could restructure itself. We will also explore possible new equilibriums, in which digital players - including platforms, but not only - would take up a new role.

 

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