Amid the uproar provoked by the alleged misdeeds of Cambridge Analytica, one could be forgiven for missing another important tech-related story this week. On Wednesday, the European commission announced its plans to introduce an EU-wide tax on large technology companies’ revenues, as a response to their well-known practice of minimising their tax liabilities by shifting profits overseas.
The idea of a tax on turnover isn’t new, with the British, French, German, Spanish and Italian governments all having at various points considered one. But the EU is the first major political actor to put forward a concrete proposal. The commission has called for a 3% levy on internet-based firms with annual global revenues of at least £658m and EU revenues of £44m – thereby capturing giants including Google, Apple, Facebook and Amazon. It expects this to raise £4.3bn initially, a small amount but a good start nonetheless.
A tax on turnover clearly isn’t the perfect solution. Most economists would agree that profit is a fairer basis for taxation than revenue, given that profit is essentially a form of “rent” that would not exist in a perfectly competitive market. In practical terms, too, it is less than optimal – one need only think of the startups that would be hit before managing to break even, or the promising companies in the process of scaling up that generate large revenues but also large losses.
The EU’s proposal goes some way towards addressing these issues, however, by taxing only firms large enough to have acquired a dominant position in their markets. The commission has also described the proposal as an interim measure while a rational solution at the global level is worked out, which may take quite some time. The Liberal Democrats fully support this approach. As an internationalist party we strongly believe in global treaties, but we also recognise the need to act now to prevent the further erosion of the tax base. Acting through the EU would enable the UK to strike a balance by taxing the tech giants in tandem with our European neighbours, rather than resorting to unilateral action or waiting for the whole world to reach an agreement.
I realise that this is made more difficult by Britain’s impending departure. It is yet another reason why my party and I are campaigning for an exit from Brexit, by giving the public a vote on the final deal, with the option to remain. The EU has so far shown itself to be the only organisation bold enough to stand up to the tech titans, as evidenced by the hefty fines slapped on Google and Apple for anti-competitive behaviour and tax avoidance respectively.
Inside the EU, both Ireland and Northern Ireland (as part of the UK) are part of the single market and customs union so share the same regulations and standards.
The only way to avoid a hardening of the border after Brexit is to ensure regulations and standards on both sides remain more or less the same in areas like food, medicines and so on.
This might imply a permanent acceptance of EU rules – something that would be anathema to hardline UK Brexiters and the DUP, who reject anything that would "decouple" the North from the UK.
David Davis told parliament that regulatory alignment would not mean adopting exactly the same rules as the EU but "mutually recognised" rules and inspections.
However, an official in Brussels countered that regulatory alignment would mean that the UK would have to implement rules from Brussels without having any influence over them.
What is the government’s plan for ‘regulatory alignment’?
Davis says the UK could continue to follow some rules of the EU’s single market. This would help avoid a hard border, but would also limit the UK’s ability to diverge from EU regulations.
What does the EU think?
Davis thinks the UK and EU can agree to meet the same aims, while achieving them in different ways. The EU believes this could see its standards on workers’ rights and the environment undercut.
Can it even work?
Parliament cannot bind its successors. This principle would mean a deal would never be completely secure for more than five years – putting its feasibility in doubt.
Even if Brexit does happen, the UK should remain as close to the EU as possible by remaining in the single market and customs union and by maintaining regulatory alignment, including in our tax and competition policies. It is a simple matter of fact that the UK’s ability to influence the tech titans is far greater as part of the world’s second largest economy and a market of 500 million people, than as the fifth largest economy with a market of 65 million people. A common approach to tax is necessary if we want to stop global multinationals playing off jurisdictions against each other.
Ensuring that large tech companies pay their fair share of tax is just one part of challenging their dominance. The very serious allegations made against Cambridge Analytica involving data harvesting and microtargeting highlight the need to strengthen the control people have over how their data is gathered and used. Here again the EU is ahead of the curve with its general data protection regulation (GDPR), now finding its way into UK law, and its mission to create a digital single market.
The General Data Protection Regulation (GDPR), which came into force on 25 May 2018, replaced the patchwork of national data protection laws across the EU with a unified system that greatly increased the fines regulators could issue, strengthened the requirements for consent to data processing, and created a new pan-European data regulator called the European Data Protection Board.
The regulation governs the processing and storage of EU citizens' data whether or not the company has operations in the EU. To ensure companies comply, GDPR also gives data regulators the power to fine up to €20m, or 4% of annual global turnover. In the UK, the previous maximum fine was £500,000; the post-GDPR record currently stands at more than £180m, for a data breach reported by British Airways in 2018.
Data breaches must be reported within 72 hours to a data regulator, and affected individuals must be notified unless the data stolen is unreadable. Fines can also be levied against companies that act on data without explicit and informed user consent, or who fail to ensure that consent can be withdrawn at any time.
GDPR also refined and enshrined in law the concept of the "right to be forgotten", renaming it as the "right to erasure", and gave EU citizens the right to data portability, allowing them to take data from one organisation and give it to another.
The phenomena of fake news and extremist content linked to the rise of social media also require a robust response. And competition policy will need to be rethought in a digital era where market dominance often can’t be measured by high prices.
We stand at a fork in the road. One path leads to a post-Brexit Britain in which a regulatory race to the bottom has left consumers with little control over their data and the government helpless in the face of multinationals’ aggressive tax planning. The other path leads to a Britain either still in the EU or closely aligned with it, working alongside its continental neighbours to build a truly effective system for regulating and taxing the digital economy. I know which option I prefer.
• Vince Cable is leader of the Liberal Democrats and former secretary of state for business
