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A new surge of tax creativity in response to the digital Big Bang

Emmanuelle Deglaire , Associate Professor

The consequences of digitalisation for our society are many and far-reaching. 

Reading time :
29 Jun 2018

To take just one example, our town centres are losing their shops as delivery lorries clutter them up.

In a laudable attempt to revitalise urban shopping areas, the senators have just chosen taxation as a means of action. The idea is simple: make e-commerce companies with a turnover of more than €50 million collect a minimum tax of €1 per parcel delivered, calculated in proportion to both the purchase price of the goods delivered and the distance travelled by the parcel: 1% below 50km, 1.5% between 50 and 80 kilometres and 2% above that.

Emmanuelle Deglaire, Professor of Taxation and member of the LegalEDHEC research centre, and Michel Philippart, Professor of Supply Chain, join forces to decipher the underlying principles of this new proposal.

In operational terms, why are city-centre shops less economically efficient than e-commerce sites?

Let's take the simple example of a mid-range electric shaver from a major brand and compare the prices "free delivery". It costs €89.99 on Amazon. The 'official' price, recommended by the manufacturer and often applied by small retailers, is €109.99. French retailers with both a physical shop and an online shop, such as Boulanger or FNAC, sell it for €99.99.  To identify Amazon's advantage, we need to break down the costs into four key elements:

► The purchase price negotiated by Amazon with its global strike force is significantly lower than that negotiated by a town centre store.

Storage costs: a town-centre store will have to keep a stock of slow-moving items in inventory, whereas Amazon's stock will move much faster; the cost of safety stocks will be minimised.

Choice of assortment: Amazon can capitalise on a large amount of data and artificial intelligence tools to stock only products with a high probability of sale, and optimise its service rate. The city-centre shop will offer what the sales representative of the represented brand will push and without many tools. The cost of obsolescence is very low for Amazon, which has few unsold items, unlike the town centre retailer, who has to go through the sales phase for a greater number of items, unless he has decided to lower his service rate to avoid unsold items, but losing sales in the process.

Fixed costs, particularly property: the price per square metre in city centres is much higher than in the logistics zones where Amazon is based. Shops have to pay for decoration and furnishings, whereas Amazon makes do with metal shelving. And the sales generated by a square metre of Amazon space are much higher than those generated by a square metre in a city centre.

Objectively speaking, a tax of 1 to 2% is not going to be enough to restore the balance of prices charged in favour of town-centre shops.

From a tax point of view, are the web giants in the same position as local businesses?

The hallmark of a global company is that it operates in several jurisdictions. The well-known mechanism of transfer pricing allows companies belonging to the same group to locate most of their profits in the structure located in a country with an attractive tax regime.

A small trader based in a single tax jurisdiction will not be able to do the same. And while there is no denying the possibilities for adjusting the tax burden under domestic law, these are out of all proportion to the opportunities opened up by multiple foreign locations. What's more, if the international company is digital, the field of possibilities is multiplied. The outdated principles of taxation have difficulty in reaching the profits made through a website, and apply only to offices, factories and shops.

So, after struggling to attract customers despite structurally much higher prices, the local shop is going to face a tax burden on its profits that is incommensurate with that of its digital and global competitor.

So is the battle lost in advance?

Some battles have already been won. For example, when it comes to VAT, big or small, digital or physical, the same tax will be applied, with the single criterion used throughout Europe being the buyer's place of residence.  This is a major achievement, given that the United States is currently fighting to subject its own national giants to the same principle for the Sale Tax applicable to sales made between two of its fifty States.

When it comes to taxing profits, much remains to be done. There is no doubt that the rules of international taxation are being rewritten under the impetus of the OECD. And without waiting, the European Union is moving towards a provisional 3% tax on digital activities aimed at the turnover of the giants in the sector.

But the depth of the social upheaval brought about by digital technology should not be underestimated. As the cost analysis above has shown, the quantity of data collected and the quality of the artificial intelligence tools used to exploit it are the key resources of tomorrow's great successes. So when will we see a tax on data? And why not a tax on AI? When oil became a strategic commodity, it prompted the creation of an ad hoc tax... 

As our senators have shown, one thing is certain when it comes to taxation: creativity knows no bounds!

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