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Aarshin Karande

March 18th, 2021

Why is geography relevant to “digital tax”?

0 comments | 21 shares

Estimated reading time: 5 minutes

Aarshin Karande

March 18th, 2021

Why is geography relevant to “digital tax”?

0 comments | 21 shares

Estimated reading time: 5 minutes

How and where to tax big technology companies is an issue that is attracting increasing global attention, explains Aarshin Karande, a strategist with expertise in media, policy, design, and research who graduated from the LSE in 2016 with an MSc in Media and Communication Governance. This is the fifth in a series of posts by former MSc students of LSE’s Department of Media and Communications, looking at various issues in media governance around the world.

In his 1938 play Caligula, Albert Camus writes that “It is no more immoral to directly rob citizens than to slip indirect taxes into the price of goods that they cannot do without.” Does this apply to Big Tech?

Though most tech giants are based in one country, companies like Facebook, Amazon, Alphabet, Microsoft, and Apple serve and profit from many countries where they have no physical presence. As a result, governments across the globe have questioned how to tax these virtual, transnational, tech corporations for revenues earned in territories where they may not be physically present but are nonetheless commercially active.

Though Facebook is based in the United States, its largest user base resides in India. Who should receive the tax revenues resulting from those users’ activities? If not the United States, or India, then what of another country that happens to have lower tax rates?

Estimates suggest governments are losing out on $100 billion to $600 billion annually from tax avoidance practices known as “base erosion and profit-shifting” (BEPS). This occurs when:

  • Companies use deductible payments (e.g., interest and royalties) to reduce the reported profits earned in a specific place.
  • Companies report profits in low- or zero-tax jurisdictions using in-house transactions.

Any content produced by users for social media companies, search engines, and online marketplaces become marketable data for a transnational company. But the countries in which those users live receive little or no tax income from the companies who benefit from such operations.

Therefore, the technological overriding of national borders – the commercial erasure of geography – has compelled governments to pursue unilateral actions addressing the tax challenges of digitization. This becomes problematic for companies who can face double taxation and where taxation can be weaponized.

For example, unilateral taxes that were passed on from companies to consumers were used in Uganda, resulting in millions of people quitting digital services to protest the inconvenience of new digital taxes. Such developments may drive tax competition (i.e., a “race to the bottom”) leading to increasing uncertainty for businesses in an already challenging global economy.

Consequently, the OECD and G20 have led efforts bringing together 134 countries and jurisdictions, to reach a consensus about a framework on international digital tax rules to prevent BEPS.

On what would a digital tax be collected?

Though the OECD and G20 scheme aims to establish an international digital tax standard, some early efforts were taken to tax tech giants, which include:

  • In 2019, France rolled out the first digital services tax. This involved a 3% levy on digital revenue (e.g., targeted advertising, selling data) for companies with at least €750 million in global revenue and digital sales of €25 million in France.
  • This year, India introduced an “equalization levy” targeting non-resident companies that engage or sell to Indians and is designed to safeguard against lost revenue from Indian ecommerce operators.

Tech companies and their advocates argue that penalizing innovators for reduced land use and unemployment caused by digitization is “unfair.” Consequently, many leading Big Tech companies have indicated ways they would respond to new unilateral digital tax schemes before multilateral schemes are developed and implemented.

  • Companies like Apple would pass the cost of the taxes onto consumers by raising the prices of apps and in-app purchases to reflect a country’s digital tax and adjust proceeds for developers who live elsewhere.
  • Amazon is following a direction similar to Apple, where third-party sellers will be confronted by a rise in referral, fulfillment, and storage fees.
  • Google has indicated plans to raise fees on all advertising bought on Google Ads and YouTube.

Concerns have grown about how these retaliations and adjustments will impact a global economy already sored and displaced by the COVID-19 pandemic.

These tax rules attempt to diminish the dominance of market incumbents. Moreover, the issue of how to create a fair and transparent tax scheme for transnational corporations whose data practices may not be fair or transparent, remains a challenge.

An Augmented Approach in Australia

As Big Tech benefits disproportionately from the content generated by others, some governments have considered ways to curb digital dominance and empower more competitive practices. In this spirit, Australia’s Competition and Consumer Commission (ACCC) drafted a bargaining code for news media whereby companies like Google and Facebook would be forced to pay for news posted to their sites. These payments would help fund public interest journalism.

Warning against this approach, Google and Facebook have stated how the scheme could damage the content quality of their platforms. Facebook signaled its dissatisfaction by implementing a ban – now lifted – on Australians sharing news on Facebook and Instagram.

After negotiations for a voluntary code failed, the ACCC moved towards a mandatory one. This example highlights how international digital tax policy may prove to be a watershed for other fees, international and regional, that Big Tech may confront in a content-determinative digital consumer global economy.

Need for new international standards

As scrutiny of and alignment against Big Tech practices grow amongst international leaders, so does the prospect of new international standards for digital taxation. Particularly at a time where the global economy is struggling by pandemic-stricken incumbents, many countries look to Big Tech as a scapegoat for diminishing funds and an untapped source for revenue generation. The aim of global digital tax benefits from the support of popular public opinion as well.

Among the practices being considered for digital taxation include:

  • Taxing the sale of advertising and data (e.g., revenue and user data from “free” search engine and social network use).
  • Taxing the sale or access to digital content (e.g., online subscription services).
  • Taxing the sale and resale of goods (e.g., online marketplaces).
  • Taxing multi-sided platforms (e.g., ride-sharing apps and rental platforms).

The dispute about digital tax, globally and locally, will certainly reshape the revenue generating schemes between transnational corporations and governments involving digital services going forward. There are four important dimensions of this regulatory process:

  • Transgeographical Standardization: The conventional notion of taxing transactions based on a single location is on its way out. The lifecycle of transaction and the various locations they involve will be brought into consideration. A failed multilateral digital tax and the proliferation of unilateral digital taxes would lead to great conflict.
  • Opportunities for Growth at Scale: The global digital tax system must be made to incentivize investment and growth. Reforms must be responsive to developing countries as well, keeping in mind resource-constrained administrations.
  • Appreciating Business Diversity: As data collection and analytics practices continue to abound, the question of how to define digital business persists. How is value placed on data? How are profits shared and owed in countries where users are located? How does size matter?
  • Content Monopoly and Digital Freedom: As successful digital taxation proves the need to rein in Big Tech power, developing the bargaining power of media companies against content monopolies becomes important to ensure normative goals for content quality and freedom in an increasingly digital-first global society.

Development of international standards is likely to be a long and complex process, but the benefits of a well thought-out, nuanced and consistent approach would be significant.

This article represents the views of the author and not the position of the Media@LSE blog, nor of the London School of Economics and Political Science.

About the author

Aarshin Karande

Aarshin is a strategist with expertise in media, policy, design, and research. He graduated from the LSE in 2016 with an MSc in Media and Communication Governance.

Posted In: Internet Governance

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