Insights

The dangerous game of taxing technology companies

17 March 2020, By Eva Calo

Spain is the first European country to establish the so-called “Google rate”, a tax on technology companies intended to offset national taxes that these companies, in some cases, avoid paying due to their imaginative fiscal engineering. The European Union is considering applying it throughout its territory, something that has already upset the United States although other countries have similar measures such as the Diverted Profits Tax created in the United Kingdom in 2015.

We all agree that companies, large and small, must pay their corresponding taxes in the countries where they make profit. But, when a country like Spain aspires to be the “Silicon Valley” of the southern Europe, does it make sense to impose new levies, and especially to the target companies?

Perhaps we should take a look at two European countries that stand out for their ability to attract tech multinationals: Ireland and Portugal. So how are they tackling this issue?

Canela

Ireland: Tech companies paradise

Google, Apple, Microsoft and Twitter are some of the big technology companies that have their European headquarters in Ireland. After overcoming a tough economic crisis, the so-called “Celtic Tiger” has once again sharpened its claws with an economy that has grown by 21% since 2017.

How does this small country with less than 5 million people become attractive to some of the world’s largest technology companies? For sure, a powerful incentive is its taxation, with a corporate tax of 12.5%, compared to 25% in Spain or 33% in France. Other factors that attract foreign multinationals are a young and highly qualified population, excellent worldwide air connections and, of course, the fact that English language is widely spoken among its citizens.

Its neighbor over the water, the United Kingdom, has also become the headquarters of many technology companies although Brexit threatens to scare away some of them away again. To avoid this, now that the country will no longer be subject to the European legal framework, the British government is considering reducing its corporate tax from the current 19% to 17% and offering other tax incentives to tech multinationals.

Portugal: makes a firm commitment to the technology sector

Another European country that is having great success in attracting technology companies is Portugal. Corporation tax is 21%, which is not especially low. However, a special tax regime has recently been launched in Madeira that reduces corporation tax to 5% during the first four years for companies that set up their businesses in the archipelago.

Portugal also has the “Startup Visa” and “Tech Visa”, a special visa regime that allows residence and work permits to be granted to foreign employees of emerging companies. And then, there is a so-called “Golden Visa” that gives residence to foreigners who invest 500.000 euros or create 10 jobs in Portugal.

Another initiative promoted by the Portuguese government is its strong support for the Lisbon Web Summit, which, with 70.000 attendees in 2019, threatens to dethrone the Mobile World Congress as the largest tech event in the southern Europe. Additionally, there is also a 300 million euros incentive programme for local startups, the creation of technological districts such as the Hub Criativo Beato or the fact that the level of English in Portugal is among the highest in Europe. Without any doubt, doubt that our neighbours are thriving!

It’s not only taxes that attract big technology players

If we take a closer look at the cases of Ireland and Portugal, currently the most successful European countries in attracting tech companies, it is easy to see that taxation is an important factor, but not decisive. For example, Bulgaria has the lowest corporate tax in Europe (10%) but is far from becoming a Silicon Valley while the Czech Republic, with 19%, is a much more attractive destination for techs even though it announced its own “Google rate” for Internet companies in 2019.

Of course, beneficial taxation is important, but other aspects have an important influence as well: investment in R&D, a propitious environment for entrepreneurship, knowledge of English, good global connections political stability… Spain has many of these ingredients in addition to other advantages such as an excellent quality of life, the world’s largest mobile penetration and not one, but two top-level entrepreneurship hubs: Barcelona and Madrid.

For this reason, adding hindrances like new taxes on tech companies, and without waiting to reach a European consensus, may not be the best strategy to win this game.

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