How US tech giants play EU states off against each other

The European institutions have shown remarkable willingness to rein in the tech industry, which increasingly functions as an oligopoly.

The Big Five — Google, Apple, Facebook, Amazon and Microsoft (aka GAFAM)— dominate the tech landscape to such an extent that it is virtually impossible to live in the digital world without using their services.

This will only become more the case as the rollout of 5G and ultra-fast broadband accelerates.

Is it any wonder that there is snowballing momentum, as crystalised by a recent letter from a group of MEPs, to prod Big Tech into reinvesting some of their substantial revenue in the very digital infrastructure which makes their services possible?

As their market dominance grows, the tech titans are enjoying remarkable financial growth.

Put together, the GAFAM companies represent 27.5 percent of the Standard & Poor 500 index, and they head up a sector which has grown by 19.36 percent over the past decade.

Apple and Microsoft are in pole position, with market capitalisations of $2.45 trillion [€2.53bn] and $1.83 trillion, respectively, after an impressive pandemic-era bump.

Apple is the largest stock by market capitalisation in the S&P 500, representing 6.4 percent, followed immediately by Microsoft with 5.4 percent; Facebook and Google are not far behind.

Curiously-low profits

Even as these tech giants’ turnover has ballooned, their profits have remained curiously low — as have the taxes paid in the European countries in which these firms are established.

Take, for example, Google’s Italian subsidiary, which paid a mere €8.1m in taxes in 2021 on a pre-tax profit of only €28m. Even as declared profits and taxes remained low, turnover exploded from €505m in 2020 to €710m the following year.

This would mean that revenue increased by €205m—while costs increased by €200m over the same period.

Through costs that increase in proportion to increasing revenue, profitability is maintained at roughly the same level from year-to-year.

These costs are also predominantly intra-group costs, via Google’s Irish subsidiary—in fact, out of the €682m in costs which Google Italy incurred in 2021, €516m were invoiced to Google Ireland.

These costs, in turn, become income for Google Ireland, which naturally pays less tax than in Italy.

Google France applies the same procedure—the tech giant’s French subsidiary paid €27.1m in corporate income tax in 2021, against an estimated French turnover of €2.7 billion, a feat of creative accounting made possible by a tax arrangement allowing Google to declare income in Ireland which was in fact generated in France.

Google is hardly the only tech titan to take advantage of such agreements.

Facebook Italy has followed a similar pattern; in 2021, its revenues increased by over €100m to a total of €348m, but costs exploded by a similar amount. Like Google, the lion’s share of these costs passed through Ireland—out of Facebook Italy’s €338m in costs, €311m were intra-group costs via the firm’s Irish subsidiary.

A costly oligopoly

Some observers have tried to justify Big Tech’s meagre tax payments in countries with heavy tax burdens by emphasising the fact that these companies create jobs and invest in next-generation technologies. However, while the tech giants have indeed brought some social benefits, particularly during the pandemic, their market dominance comes at a steep cost.

Indeed, a growing share of internet traffic is generated and monetised by Big Tech platforms — an uptick in traffic that necessitates corresponding upgrades in digital infrastructure, requiring significant continuous investment by the telecommunications sector.

This investment benefits citizens by allowing them to take advantage of the digital transformation, but is only sustainable if the tech giants driving the increased traffic also contribute their fair share to network costs.

For years, the telecoms industry has denounced what they regard as ‘abuse’ by GAFAM companies, which the telcos say exploit the benefits of their telecommunications networks without contributing anything towards their development and maintenance.

European operators are currently investing €52.5bn a year in their networks, while at the same time stepping up efforts to make their networks more sustainable.

Policymakers across Europe are increasingly adhering to the telecom industry’s perspective.

Italy, France and Spain recently reaffirmed the need for Big Tech to pay part of the substantial costs involved in upgrading Europe’s network infrastructure, noting that the major content providers now account for 55 percent of the internet traffic generated in Europe. This imposes specific costs on European telecom operators, right as they are already investing heavily in 5G and fibre to the home.

Rome, Paris and Madrid have asked the EU for legislation that ensures that all market players contribute to the costs of digital infrastructure.

This is a fair and democratic proposal, though it should be enacted with care, addressing the concerns of some digital rights activists who have argued that involving large tech companies in network investment could endanger net neutrality on the European market.

As Italy, France and Spain argued in their recent missive, it is absolutely possible to strike a balance that guarantees fairness between investors and respects the rules of net neutrality, which is a fundamental principle that should be preserved.

While Big Tech is naturally opposed to any efforts to exact a greater financial contribution from the sector, the returns could be lucrative for all of Europe—an annual investment of €20bn on Big Tech’s part could help generated €72bn in the EU economy.