published Jun 7th 2016, 12:55 pm, by Leonid Bershidsky

(Bloomberg View) —
Greece, that hotbed of worst economic practices, has provided a perfect illustration of one of the biggest problems facing governments: In a world that’s increasingly unified by technology, the fiscal systems are still designed for 20th-century business models.

QuickTake The Sharing Economy

A series of tax hikes went into effect on June 1 in Greece, including a one percentage point rise in the value-added tax (more familiar to Americans as the sales tax) and a new 10 percent charge on pay TV. Greek hotels and media companies will have to cough up the extra money in addition to the 3 percent of profit required since last year, when corporate tax went up to 29 percent. Yet U.S. companies such as Airbnb and Netflix, which compete directly with Greek businesses, won’t be paying.

Airbnb is a private company that doesn’t release any financial data, but it lists thousands of properties in Greece, so the revenue it generates there is substantial. Airbnb hosts are required to pay local taxes, but the cash-strapped Greek government doesn’t have the resources to go after them — even in the U.S., a lot of the hosts don’t pay taxes on their rental income. Many of the Greek hosts are not registered for VAT purposes. And of course, Airbnb itself pays no corporate tax in Greece on the profit from commissions.

Netflix, according to the Greek government, is not in the pay-TV business, and is not subject to the new tax. As for corporate tax, what little it pays is in the U.S., where the company’s effective tax was a mere 13.6 percent last year, compared with the 35 percent statutory rate.

Greece’s new taxes are a component of the European Union-designed rescue package: The hapless country’s creditors want it to increase fiscal revenue. But by imposing the VAT and corporate tax hikes and sectoral levies, they are hurting local businesses that could have contributed to economic growth. They also help U.S. tech giants, which mainly contribute to growth — and to government coffers — in the U.S.

The EU should know better. In an action plan on the VAT released in April, it estimated the collection shortfall for this tax at 170 billion euros ($193 billion) a year, or 15.2 of planned revenue. One of the reasons is that the European system for taxing internet-based business — e-commerce, content streaming, “sharing economy” operations — is highly inefficient. Starting last year, businesses selling products and services electronically across EU borders have to charge VAT in the country of purchase. Even though there’s a “one-stop shopping” system for paying the tax across the entire EU, merchants still have to keep information about every transaction, report it and keep track of VAT rates in different countries. It’s a mess and a hassle, and many vendors would rather take the risk of breaking the rules.

The EU promises “a legislative proposal to modernise and simplify VAT for cross-border e-commerce” by the end of this year and a “VAT simplification package” for small business next year. While the bureaucracy works on these proposals, a lot of business goes untaxed.

At least when it comes to the VAT, the EU is doing something, and it’s probably within its power to simplify compliance and make it more attractive than noncompliance. Corporate taxes are tougher to fix. The Organization for Economic Cooperation and Development has been working on proposals for the digital age since 2013. Late last year, it published a report discussing the options. These include forgetting the age-old concept of “permanent establishment” and charging a corporate income tax wherever profit is made, regardless of whether a company has a tangible presence in that country, or taxing the gross receipts of an internet company where they occur.

The latter option is probably more workable. Corporate income taxes are easier to beat through the use of transfer pricing, intracompany loans and royalties on intellectual property — techniques big U.S. tech companies use to avoid paying taxes in Europe. Trying to eliminate specific workarounds leads to a cops and robbers game between regulators and corporate lawyers: New structures are immediately hatched. Some sort of tax on gross receipts, which would force both Airbnb and Netflix to share taxes with Greece, would be a blunt but effective tool.

Yet to implement such a program, dozens of countries would need to agree on specific changes to hundreds of double taxation treaties. Then, ways of tracking transactions and taxing them will have to be developed, just as with the VAT. OECD recommendations help, but real-world solutions are still far away.

Meanwhile, the almost untaxed U.S. tech companies will continue to grow and collect monopoly rent throughout the world, thanks to business models that are so far ahead of governments’ ability to tax them.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story: Leonid Bershidsky at lbershidsky@bloomberg.net To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net

For more columns from Bloomberg View, visit Bloomberg view

copyright
© 2016 Bloomberg L.P