The European Union’s executive arm has proposed an unusual new tax: a levy on the revenue (not the profit) of technology companies. Many EU countries say the tech industry isn’t paying its fair share to public coffers, and the effort to crack down on tax-avoidance schemes has led to large bills delivered in recent years to Apple Inc. and Amazon.com Inc. The idea behind the new tax is to focus on where tech users are based, rather than where a company chooses to place its European headquarters.
1. How exactly would this tax work?
If Facebook sold an ad based on its users in Brussels, say, it would pay the tax in Belgium. Under the proposed plan, the tax rate would be 3 percent, a level which could yield around 5 billion euros in new revenue per year. The levy would be an interim measure until a more comprehensive, longer-term solution proposed by the European Commission was in place, although negotiations on that could take a while.
2. Isn’t this more than an EU issue?
It is, and EU leaders would prefer a global approach, but several countries have already said they are prepared to move alone until work at an international level picks up. The new tax is meant to be an interim step as the EU works on a better way to tax tech companies’ corporate earnings.
3. Who would be affected?
According to the commission’s plan, the tax would cover companies that offer advertising services or that sell user data, such as Google parent Alphabet Inc. and Facebook Inc.; companies that let users find and interact with each other or supply goods and services directly to each other, such as Airbnb Inc. and Uber Technologies Inc. Companies that fall within the scope of the tax are those with annual worldwide revenue above 750 million euros ($925 million) and sales from taxable digital services within the EU above 50 million euros.
4. When will the tax take effect?
Not immediately. Any tax proposal needs the unanimous approval of all 28 EU members, meaning that a single dissenting country could block it. EU leaders will hold a first discussion on the plan at a March 22-23 summit, and the bloc’s finance ministers will talk about it when they meet in Bulgaria next month. The entire negotiation-and-approval process could take months, or even years.
5. Who’s not yet on board?
While all EU governments agree the current corporate tax system needs to change, some countries warn that a new tax on digital revenue could push customers to use products outside the EU’s boundaries or discourage digital use altogether. Ireland is among several countries that have argued that tax issues should be tackled globally and with the help of the Organization for Economic Cooperation and Development, which advises 35 developed countries on tax policy. But the OECD, in a report released on March 16, indicated that there is still no global consensus on how best to tax digital services.
6. Why is it so hard to tax the tech giants?
Europe’s current tax rules were designed for the traditional economy and don’t fully capture activities based on data and intangible assets, such as intellectual property. This means traditional tax systems so far have failed to capture activities where value added tends to be virtual, rather than material. And digital companies have sought to take advantage of loopholes created by uncoordinated European regulation. These loopholes allowed tech companies to re-route profits to low-tax jurisdictions, such as Bermuda, which has no corporate income tax, or Ireland, which worked out the special deal with Apple. According to the European Commission, global technology companies pay a 9.5 percent average tax rate compared with 23.2 percent for traditional firms.
7. Is this a tax aimed at U.S. tech companies?
The EU insists it isn’t, though many of the affected tech giants are U.S. companies. EU tax chief Pierre Moscovici said 120 to 150 companies, many of which are not American, would fall within the scope of the levy. “This is not an anti-U.S. tax,” Moscovici said, adding that the commission’s “proposal does not target any company or any country.”
8. What do the companies say?
Companies have been cautioning against the EU’s digital tax proposals — especially the interim levy — saying they could harm the business environment. The Information Technology Industry Council, which represents companies including Amazon, Apple and Facebook, said in a press release that the commission’s proposal “harms business certainty in Europe and would chill trade and investment from companies across the globe.” U.S. Treasury Secretary Mnuchin echoed their position last week, saying the U.S. opposes singling out digital companies, the source of many new jobs and much of the U.S.’s economic growth.
9. What might the EU’s long-term approach look like?
For the longer-term fix, the commission wants to change EU corporate tax rules so that tech companies can be taxed where value was created and profits were made, and not just where they have a physical presence. This could take time, the commission says, which is why (along with concern about country-by-country unilateral measures) an interim fix is being proposed. Under the long-term proposal, companies would have a significant digital presence and, thus would be covered by the new rules, if they meet one of three criteria: Having more than 7 million euros in annual revenues from digital services; more than 100,000 users per year; or more than 3,000 business contracts for digital services created in a year.
The Reference Shelf
- A Bloomberg QuickTake explains the global crackdown on profit shifting.
- The Organization for Economic Cooperation and Development’s report on digital taxation.
- The latest on Apple’s tax arrears in Ireland.
- How everyone is attacking big tech: a scorecard.
- A fair, permanent solution would be better than this quick-and-dirty one, writes Bloomberg View’s Leonid Bershidsky.
Paypal to allow users to buy, hold and sell four cryptocurrencies
“The shift to digital forms of currencies is inevitable, bringing with it clear advantages in terms of financial inclusion and access; efficiency, speed and resilience of the payments system; and the ability for governments to disburse funds to citizens quickly,” said Dan Schulman, president and CEO, PayPal.“Our global reach, digital payments expertise, two-sided network, and rigorous security and compliance controls provide us with the opportunity, and the responsibility, to help facilitate the understanding, redemption and interoperability of these new instruments of exchange. We are eager to work with central banks and regulators around the world to offer our support, and to meaningfully contribute to shaping the role that digital currencies will play in the future of global finance and commerce.”
This is great news for crypto but I’m told it shouldn’t have been entirely unexpected In June, there was a report that Paypal was working on direct crypto sales.
Nokia awarded contract to build 4G network on the moon
Nokia has been awarded a contract to establish a 4G network on the moon. The contract is one of several that NASA is awarding to companies as it plans a return to the moon.
The $14.1 million contract was given to Nokia’s US subsidiary and is a small part of the $370 million total awarded to companies such as SpaceX. The cellular service will allow astronauts, rovers, lunar landers, and habitats to communicate with one another according to Jim Reuter, the Associate Administrator for NASA’s Space.
The 4G network that Nokia will build will be miles superior to the form of communication that was used during the early missions to the moon.
This is not Nokia’s first attempt to launch an LTE network on the moon. It planned to do so in 2018 in collaboration with PTScientists, a German space firm, and Vodafone UK to launch an LTE network at the site of the Apollo 17 landing but the plan never came to fruition.
Stripe acquires Nigeria’s Paystack for $200M+ to expand into the African continent
When Stripe announced earlier this year that it had picked up another $600 million in funding, it said one big reason for the funding was to expand its API-based payments services into more geographies. Today the company is coming good on that plan in the form of some M&A.
Stripe is acquiring Paystack, a startup out of Lagos, Nigeria that, like Stripe, provides a quick way to integrate payments services into an online or offline transaction by way of an API. (We and others have referred to it in the past as “the Stripe of Africa.”)
Paystack currently has around 60,000 customers, including small businesses, larger corporates, fintechs, educational institutions and online betting companies, and the plan will be for it to continue operating independently, the companies said.
Terms of the deal are not being disclosed, but sources close to it confirm that it’s over $200 million. That makes this the biggest startup acquisition to date to come out of Nigeria, as well as Stripe’s biggest acquisition to date anywhere. (Sendwave, acquired by WorldRemit in a $500 million deal in August, is based out of Kenya.)
It’s also a notable shift in Stripe’s strategy as it continues to mature: Typically, it has only acquired smaller companies to expand its technology stack, rather than its global footprint.
The deal underscores two interesting points about Stripe, now valued at $36 billion and regularly tipped as an IPO candidate. (Note: It has never commented on those plans up to now.) First is how it is doubling down on geographic expansion: Even before this news, it had added 17 countries to its platform in the last 18 months, along with progressive feature expansion. And second is how Stripe is putting a bet on the emerging markets of Africa specifically in the future of its own growth.
“There is enormous opportunity,” said Patrick Collison, Stripe’s co-founder and CEO, in an interview with TechCrunch. “In absolute numbers, Africa may be smaller right now than other regions, but online commerce will grow about 30% every year. And even with wider global declines, online shoppers are growing twice as fast. Stripe thinks on a longer time horizon than others because we are an infrastructure company. We are thinking of what the world will look like in 2040-2050.”
For Paystack, the deal will give the company a lot more fuel (that is, investment) to build out further in Nigeria and expand to other markets, CEO Shola Akinlade said in an interview.
“Paystack was not for sale when Stripe approached us,” said Akinlade, who co-founded the company with Ezra Olubi (who is the CTO). “For us, it’s about the mission. I’m driven by the mission to accelerate payments on the continent, and I am convinced that Stripe will help us get there faster. It is a very natural move.”
Paystack had been on Stripe’s radar for some time prior to acquiring it. Like its U.S. counterpart, the Nigerian startup went through Y Combinator — that was in 2016, and it was actually the first-ever startup out of Nigeria to get into the world-famous incubator. Then, in 2018, Stripe led an $8 million funding round for Paystack, with others participating, including Visa and Tencent. (And for the record, Akinlade said that Visa and Tencent had not approached it for acquisition. Both have been regular investors in startups on the continent.)
In the last several years, Stripe has made a number of investments into startups building technology or businesses in areas where Stripe has yet to move. This year, those investments have included backing an investment in universal checkout service Fast, and backing the Philippines-based payment platform PayMongo.
Collison said that while acquiring Paystack after investing in it was a big move for the company, people also shouldn’t read too much into it in terms of Stripe’s bigger acquisition policy.
“When we invest in startups we’re not trying to tie them up with complicated strategic investments,” Collison said. “We try to understand the broader ecosystem, and keep our eyes pointed outwards and see where we can help.”
That is to say, there are no plans to acquire other regional companies or other operations simply to expand Stripe’s footprint, with the interest in Paystack being about how well they’d built the company, not just where they are located.
“A lot of companies have been, let’s say, heavily influenced by Stripe,” Collison said, raising his eyebrows a little. “But with Paystack, clearly they’ve put a lot of original thinking into how to do things better. There are some details of Stripe that we consider mistakes, but we can see that Paystack ‘gets it,’ it’s clear from the site and from the product sensibilities, and that has nothing to do with them being in Africa or African.”
Stripe, with its business firmly in the world of digital transactions, already has a strong line in the detection and prevention of fraud and other financial crimes. It has developed an extensive platform of fraud protection tools, but even with that, incidents can slip through the cracks. Just last month, Stripe was ordered to pay $120,000 in a case in Massachusetts after failing to protect users in a $15 million cryptocurrency scam.
Now, bringing on a business from Nigeria could give the company a different kind of risk exposure. Nigeria is the biggest economy in Africa, but it is also one of the more corrupt on the continent, according to research from Transparency International.
And related to that, it also has a very contentious approach to law and order. Nigeria has been embroiled in protests in the last week with demonstrators calling for the disbanding of the country’s Special Anti-Robbery Squad, after multiple accusations of brutality, including extrajudicial killings, extortion and torture. In fact, Stripe and Paystack postponed the original announcement in part because of the current situation in the country.
But while those troubles continue to be worked through (and hopefully eventually resolved, by way of government reform in response to demonstrators’ demands), Paystack’s acquisition is a notable foil to those themes. It points to how talented people in the region are identifying problems in the market and building technology to help fix them, as a way of improving how people can transact, and in turn, economic outcomes more generally.
The company got its start back when Akinlade, for fun (!) built a quick way of integrating a card transaction into a web page, and it was the simplicity of how it worked that spurred him and his co-founder to think of how to develop that into something others could use. That became the germination of the idea that eventually landed them at YC and in the scope of Stripe.
“We’re still very early in the Paystack payments ecosystem, which is super broken,” said Akinlade. The company today provides a payments API, and it makes revenue every time a transaction is made using it. He wouldn’t talk about what else is on Paystack’s radar, but when you consider Stripe’s own product trajectory as a template, there is a wide range of accounting, fraud, card, cash advance and other services to meet business needs that could be built around that to expand the business. “Most of what we will be building in Africa has not been built yet.”
Last month, at Disrupt, we interviewed another successful entrepreneur in the country, Tunde Kehinde, who wisely noted that more exits of promising startups — either by going public or getting acquired — will help lift up the whole ecosystem. In that regard, Stripe’s move is a vote of confidence not just for the potential of the region, but for those putting in the efforts to build tech and continue improving outcomes for everyone.
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