Originally posted on Business Post 28 February 2021.
Last week’s dispute between the Australian government and Facebook over payment for news content is just the latest chapter in a larger narrative of governments trying to manage the presence of the big technology platforms in their jurisdictions.
While it is no surprise that the action taken by Facebook to close down news-related content in Australia gained widespread attention, it is surprising that it was deemed to be necessary. Few western-style democracies launch any form of regulation or imposition on their citizens and businesses without first of all flagging the issues.
The Australian government's ambition was that its media companies might be entitled to some financial compensation for their content if reused on some digital platforms, initially Facebook and Google. This was flagged in early 2020 and a public consultation ensued, but it seems that wasn’t enough to avert last week’s stand-off over the news media bargaining code.
The actions of the Australian government reflect a broader concern across the world to try to either rein in or manage the growing influence and power of the major digital platform providers. The Australian experience is something of an outlier in that the plan was to impose a contractual obligation between content providers and digital platforms.
Elsewhere in the world, the emphasis is on imposing a different type of contractual obligation on digital platforms by way of additional digital taxes.
The Irish position on digital taxation has consistently been that an international approach to an international problem is required, and that such matters need to be worked out at OECD level. While Ireland has important allies in this approach, notably Germany, the attractions of this international consensus approach may be dwindling.
Many countries have either introduced or are in the process of introducing their own form of digital taxation. The amounts due are calculated not by reference to where the platform provider traditionally pays its corporation tax, but rather by reference to the size of their country's market for digital services.
Britain has a digital tax, and the first receipts from it will flow into the British exchequer later this year. A recent KPMG study identifies over 30 countries which have enacted digital tax rules, including Austria, Italy, Portugal, Slovakia and Spain. A few days ago, the Indian government announced changes to its own digital tax regime which, it has been reported, will have the effect of increasing the levies payable by the Googles, Facebooks and Amazons of the world. India’s action is particularly significant because of the size of the market in that country.
New digital taxes in one country inevitably have the effect of reducing traditional tax yields elsewhere. Contrary to the belief in some quarters, companies are not limitless generators of profit. Being the home of the largest multinationals, the US is likely to be the biggest loser. In one of his last acts as US trade secretary last month, Robert Lighthizer published a review of digital tax initiatives in Brazil, the Czech Republic, Indonesia and the European Union. While the review work is ongoing, it is fair to say that the Americans are taking a dim view of the various plans.
It might not be helpful to the US position on the matter that a number of US states are planning to apply forms of digital taxation to businesses in their own jurisdictions. Earlier this month, the state of Maryland enacted a tax on digital advertising. It is likely though that this will be challenged given that the state legislature had to overrule the wishes of its own governor in so doing, yet the action seems illustrative of a change in political thinking.
If that is indeed the case, it is time to re-examine the need for international consensus on digital taxation and challenge the notion that a fragmented approach creates a risk of everyone losing out, businesses and national treasuries alike. The OECD argument has long been that calculating tax on digital-economy companies should be based on where they have their markets rather than on the physical locations of their buildings and staff, because markets cannot be shifted. That argument can also embolden governments to stake their own claims to tax from their own markets using their own rules.
Imposing tax should be a political, not a technocratic, decision. Governments across the world must now deal with the deficits created by their pandemic response and they will undoubtedly look to new methods of taxation to help them do so. If that prospect includes taxing foreign corporations who do not vote, and cannot conceal their profitability in an immobile market, many finance ministers must be wondering about the advantages of waiting for the OECD to come up with a plan. Despite signals last week from the US authorities that the Biden administration seems more amenable to compromises with the OECD process than the Trump administration, consensus is still some distance away.
The ‘go it alone’ approach by the Australian government on regulating digital platforms in their jurisdiction has wider repercussions for commercial regulation. It also challenges the OECD line that together is better when it comes to taxation.
Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland
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