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EU risks trade spat with US over tech companies

Editorial Staff

The European Union is risking a battle with US President Trump. Countries, individually and federally, have been looking at the effect on domestic industries and national revenues of US companies, their tax structures and their business practices. In short, they are saying exactly what the US says: if you want to do business here, you do it on our terms. The USA doesn't like this challenge to the commercial colonialism which it has practised, largely without official resistance, since the 1940s.

Whenever, in past decades, countries have challenged the USA's imperial financial power, the response has always been a variation of "if you want our money, you take it on our terms." Post-Second World War, the USA had recovered from its Great Depression and come out of the war as the strongest economy in the world. Over the next seven decades, the USA funded wars, uprisings, rebels and capital projects all over the world on terms that US companies were the suppliers, so enriching US companies at US taxpayers' expense by paying money raised in taxes, via defence, aid and black projects, to those companies. US "government contractors" continue to benefit from direct and indirect payments.

In addition, the USA's corporations were granted extraordinary protection over intellectual property which is properly regarded as copyright by the creation of "software patents." The software patent is a means of stifling innovation and therefore competition. The USA has tried to demand that other countries adopt software patents as a condition of trade or aid. However, there is widespread resistance because, insofar as there is such a thing as a "solution," the software patent makes it illegal for rivals to adopt a similar approach to a problem even though the code is entirely different. One such example is the patent lodged to a US company for delivering tests (e.g. examinations) over the internet. It was so broad that the only ways that e-learning companies could provide examinations for their customers were to ignore the patent and risk legal action or to pay a licence fee. That patent has now expired.

It is ironic that the USA expands the reach of its taxation system to take in even micro-businesses doing a few hundred dollars of business in or via the USA each year but it actively facilitates the use of offshore vehicles for the purpose of avoiding tax in countries where large US companies do business. It is also ironic that the USA criticises and sanctions foreign corporations for receiving information from its customers while its own giants, for example google, facebook and Amazon.com have generated inconceivable fortunes from doing exactly that in both domestic and foreign markets.

Further, the USA has demanded that foreign jurisdictions obey its demands as to, for example, tax systems while its own system of taxation permits so many tax reduction strategies that a handful of people and companies can retain vast profits while smaller businesses and private citizens suffer a disproportionate tax burden through both direct and indirect taxes.

France, recently, incurred the USA's wrath by announcing that US tech companies doing business in France would be charged taxes as if they were in France and that tax reduction strategies such as transfer pricing, booking profits offshore, invoicing of services and intellectual property via offshore entities would not per permitted to reduce tax that would otherwise be due. France has done this by using very measure that US companies like to use to prove their worth and value - "revenues." This fiction is of the USA's own making and was at the heart of the USA's dot com bubble nearly three decades ago. France says, simply, certain foreign businesses must pay a 3% tax on revenues. An article in the Harvard Business Review this week says "But we argue that one-size-fits-all taxation of large digital firms based on their gross revenues is too blunt an instrument to address the putative budgetary deficits of local governments. " Petard, meet hoist. If that assertion has any validity, then US stocks would be priced relative to profit and revenues would not enter into the equation. They can't have it both ways. The important part of that statement comes in the last few words: don't mess with US companies to address shortfalls in your domestic budgets. They might like to point that out to the USA's IRS with a view to considering its withholding tax which operates at 30% of gross revenues, in the absence of a double taxation agreement, regardless of any legitimate costs e.g. direct costs of production and shipping even when performed by US persons. To be fair, the authors of that article (link below) do say that the French tax "mimics" that on royalties, etc. But they they go and spoil it all by saying that Value Added Tax should be replaced by Sales Tax, in the manner of US taxation while a very significant proportion of the world is moving to a VAT-style system precisely because it reduces the opportunity for tax evasion. It's odd - three of the four authors are senior academics in Canada where there is a national VAT-style system (called GST) and states operate a supplemental sales tax.

But the European Commission's findings against US tech company Qualcomm have nothing to do with tax: it's about the abuse of dominant position and it's got nothing to do with the fact that Qualcomm is a foreign business, although the USA won't see it like that. The irony is that it arises out of quasi-dumping activity where Qualcomm sold chips for use in smartphones made by Huawei and ZTE, companies against which the USA has taken extremely hostile action, for significantly less than the cost of production. The effect was that UK company Icera, a relatively small company at the cutting edge of chip design, was unable to effectively compete.

The EU's competition commissioner Margrethe Vestager said "Qualcomm sold these products at a price below cost to key customers with the intention of eliminating a competitor. Qualcomm's strategic behaviour prevented competition and innovation in this market and limited the choice available to consumers in a sector with a huge demand and potential for innovative technologies."

Given that the USA regularly penalises foreign businesses for dumping, the USA's criticisms of the EU's action are hollow empty vessels make the most noise. Icera's website remains active but, seemingly, has not been updated since 2011. In 2011, Icera was bought out by US company Nvidia - which, even more ironically, is head-quartered in the USA's on-shore tax haven and corporate secrecy jurisdiction, Delaware despite its operations being, primarily, in California. Icera's wireless tech division was shut down.

Qualcomm was subject to a bid by the then Singapore company Broadcomm but US PoTUS Trump personally intervened to block the deal. Broadcomm responded by moving its domicile to the USA. Broadcomm was founded by a Malaysian in the USA, moved its domicile to Singapore and its move back to the USA was shortly after the USD117,000 million deal was blocked on the grounds of "US national security." So far, it has not been revived. But Qualcomm is in trouble in the USA for predatory pricing. Again the US Government has intervened to defend the company saying that its chips are essential to the workings of government. That court case continues.

Qualcomm was previously fined in the EU because it paid Apple to reject bids from competitors. No bribery action has been taken in the USA in respect of this conduct. The EU fine was €997m in January last year. The latest fine, €242 million, will not find its way back to those who lost as a result of Qualcomm's actions against Icera.

The action will, however, further strain relations between Trump's USA and both the EU and individual countries within it. There is no doubt that Trump's peace mission to the UK recently with offers of all manner of technical assistance when the UK is free to do trade deals with the US and others, was with a view, in part, to preparing the ground for US tech companies to operate in the UK without the constraints that are, of course, a form of protectionism but protectionism to ensure fair competition not to exclude fair trade.

Further Reading: https://hbr.org/2019/07/the-pr...

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