by Ugh
Warning: some free form thoughts on online social media platforms, tax policy and tax avoidance.
Individual countries around the world have begun enacting specialized tax regimes targeted at "digital" businesses. These include things like digital services taxes, digital advertising taxes, a tax on digital transactions, and various other taxes aimed at the usual suspects, Google, Facebook, Apple, Netflix, Amazon, etc.
To generalize, the primary complaint among countries implementing these sorts of taxes is that these companies have a significant "presence" in their jurisdiction - either via sales and/or data sourcing (or both) - and yet pay little or no tax to those jurisdictions because such a presence doesn't rise to the traditional international standard for those countries to tax those companies' profits.* Most in the international tax community consider these kinds of targeted taxes as "bad tax policy," which seems right to me.
OTOH, these sort of taxes are aimed at these companies from an intuitive sense that the companies, or I will argue "someone," more broadly is getting away with something tax wise. I think that's right but I think these countries, by aiming the taxes at such "digital" companies, are missing the target. Instead, I would argue that the ones getting away with tax avoidance in the digital arena are the billions of users of these online platforms.
Many of these platforms offer their service for "free." But it's not really free. Instead, in exchange for access to Facebook's platform, or gmail, or any of the other online services that you can use for no-charge, you are turning over some portion of your personal data. So in fact your access to Facebook is a barter transaction, where Facebook gives you access to its online platform in exchange for your data. In that way the average user acts as a "supplier" to Facebook, who then uses that input (the data) in its profit making business and pays taxes on its corporate profits.
But the real tax avoider in this situation are the Facebook (or gmail, etc.) users. They have used an asset of theirs - data - in which they have zero basis and upon an exchange of which they should (in theory) owe tax based on the difference between the value of that data and that (zero) basis. Instead, this transaction goes untaxed. Moreover, these "free" (i.e., untaxed) online platforms have displaced a massive amount of economic activity that would have otherwise been subject to tax.
Take "free" online email, for example. Now you can communicate with friends, relatives, colleagues, strangers, businesses, etc. instantaneously and at only the cost of an internet connection (which also enables many other activities). Formerly, you would have had to place a phone call, which could be taxed, or write a letter, which required a stamp, plus paper, envelopes, and a pen - all purchases which would have been subject to tax (and on which the producers of those products would pay tax on their profits). Multiply this by any number of things one gets for "free" online. But those transactions have been replaced by this tax-free barter transaction of data in exchange for services.
So my theory is that a large part of the big revenue drop for countries is due to their policy choice - conscious or unconscious - to refuse to tax users on the value of their use of online platforms. Now, there may be good reasons for this, mostly practical, but I don't think one of them is that there is no exchange of value going on between users and these online platforms. These sorts of things have tremendous value to users - ask yourself if you were told that your Facebook, gmail, Amazon, etc. account was going to be deleted tomorrow, how much you would pay to ensure it wasn't deleted?
Anyway, some rambling from me since I'm just back from a conference on this exact subject and no one mentioned the possibility of taxing users. Plus, I see stupid comments from Presidential candidates saying things like Facebook "use[s] us, and we’re their commodity, and we’re not getting anything out of it..." Except, you know, access to Facebook! An online platform that costs hundreds of millions, if not billions, of dollars to build and maintain....
*Generally, a foreign company must have a "permanent establishment" in a jurisdiction for that jurisdiction to tax the profits of that company, and such establishment required an actual physical presence in the country (or the company must have an agent authorized to conclude contracts on its behalf operating in the country).
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