Inside Business

December 12, 2012 6:57 pm

Riches draw attention to internet groups

As countries struggle, the big success of companies such as Google has become hard to ignore

What do a spat over the taxes that Google and Amazon pay in the UK and a multinational conference on the internet taking place in Dubai have in common?

On the face of it, not very much. But they are united by at least one thing: a growing awareness of the immense power – and profits – of some of the richest US technology companies. As many countries struggle with their own dire fiscal positions, this conspicuous success has become hard to ignore. Less friendly tax regimes and encroaching regulation are becoming a very real threat.

The Dubai conference, under the auspices of a branch of the UN called the International Telecommunications Union, has been deadlocked this week over the question of how the internet should be governed. This has revealed a deep philosophical rift over censorship that has already turned parts of the internet into a series of closed national networks. The risk now is that, sanctioned by an international treaty, this will harden into restrictive regional blocs.

Behind the tussle for control, however, lies a second fight, over money. Telecommunications was once one of the cash cows of the developing world: the high termination rates that were charged by telecom operators on international calls were a way to extract money from other operators (and their customers) based in richer countries.

That system has long been under attack. But the internet presents an alternative source of revenue. That explains why many countries in Africa, the Middle East and elsewhere have been pushing in Dubai to extend the old “sending party pays” regulations of the traditional telecoms world to internet traffic, imposing a direct charge on internet companies to reach their customers overseas.

It is only natural that governments and communications companies around the world should look to the immense wealth of Google and its peers – and it is easy to make a case for taxing the companies that are responsible for generating most of the traffic that clogs up the networks to help pay for upgrades. Europe’s telecoms companies have been pushing the same case for years. As the tense discussions in Dubai entered their final round on Wednesday it looked as though this risk had been headed off, at least for now. But it is guaranteed to remain a subtext of future international negotiations.

In the UK, meanwhile, recent questioning from politicians has drawn attention to the way that many US tech companies structure their international operations to channel revenues through low-tax countries like Ireland. Shifting intellectual property to tax havens, which allows the companies concerned to claim that they have “earned” much of profits in those places even when sales have been generated elsewhere, has long been a staple of international tax planning.

It may all be entirely legal, but companies can hardly complain when such transparent tax avoidance draws political – and public – opprobrium.

The huge riches of the most successful tech companies make a highly conspicuous target. Apple’s cash and investments have now reached $121bn and are set to rise much higher. Its free cash flow will jump from $42bn this year to $65bn in 2014, despite the $11bn in stock dividends it is likely to pay a couple of years from now, according to estimates by UBS.

Against this background, it has become a matter of smart public relations for the leading tech companies to show they are doing more to foster social and economic good in the main countries in which they operate. As so often in an industry that has been reactive in dealing with the broader implications of its growing influence in the world, this has been late in coming, but is timely for all that.

Tim Cook’s promise last week to bring some Apple manufacturing jobs back to the US is one sign of the shift. The number of jobs at stake is small, but the symbolism was not lost. Apple has also belatedly started to make the case that it is responsible directly or indirectly for nearly 600,000 jobs in its home country, half of them through the app economy. For Mr Cook’s Apple, being seen as good public citizen has become a matter of urgency.

Google, the tech giant most directly in the regulatory firing line, has spent longer building a similar case for its own beneficial impact on economic activity and jobs. How well it has done at this will soon be evident: its attempts to head off sanctions from antitrust regulators in the US and Europe are coming to a head.

Should it be seen as a greedy monopolist or beneficent job creator? The verdict will soon be in.

Richard Waters is the Financial Times’ US West Coast managing editor

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