A number of countries have, or are proposing, new taxes on digital services where user participation, user data, or user generated content is significant. These taxes are targeted at a small number of large multinational corporations whose users provide data or content in exchange for “free” digital services, such as search, email and/or data storage, and the user data is then sold for targeted online advertising.
These tax proposals likely miss most of the untaxed income and services. Information reporting or withholding by digital intermediaries, such as Uber and AirBnB, would improve tax compliance rates by household suppliers of these services. Taxing the barter income and payments of digital platforms, such as Facebook and Google, would raise revenue while reducing economic distortions. Ensuring digital services and goods are subject to countries’ value-added taxes would help level the playing field with domestic and non-digital suppliers.
The European Union and the United Kingdom, among others, have recently proposed interim digital services taxes prior to the G20/OECD BEPS Inclusive Framework countries reaching a more comprehensive international agreement on the corporate taxation of digital businesses. The proposals are excise taxes on certain cross-border revenue of certain digital businesses.
The OECD’s 2018 interim report, Tax Challenges Arising from Digitalization, notes significant differences of opinion about the contribution of user data and content to the value creation (and taxable income) of multinational corporations. Agreement on a “digital presence” permitting countries to tax multinational companies that have many users in a country is likely, but how much income to attribute to their contribution is quite controversial. Some countries think user participation is a new factor integral to companies’ value creation. A second group of countries think user participation contributes to intangible assets used by companies in their value creation. While a third group of countries think user contributions are similar to business inputs purchased from independent third parties, and thus are not part of a company’s corporate profits.
The focus to date has been principally on international corporate income taxation. However, the largest potential tax revenue from digital economic activity, similar to non-digital economic activity, is in personal income taxation and indirect taxation (value-added taxes). The OECD BEPS Project recommended using the destination principle for determining the place of taxation of cross-border supplies and approaches for more effect VAT collection on the growing volume of imports of low value goods from online sales. This is already resulting in increased VAT revenues.
Although politicians prefer to tax foreign companies, if they are serious about the potential revenue from untaxed income generated by user data and user content, they should focus on personal income taxation. In the multi-sided business model of social networks, users receive “free” digital services, such as email, search and data storage, in exchange for providing user data, which is then available to the digital business to sell targeted customer advertising. In these barter transactions, users provide valuable data without recognizing any (taxable) income and without paying any monetary consideration for the digital services. This is shown in the above diagram.
The value of these individual barter transactions may be relatively small, say $5 per month, but in the aggregate, could be quite large. If there are 500,000 users using a network, the annual barter income could be $30 million. Instead of a 2% or 3% excise tax as envisioned in the UK and EU proposals, the average income and social security contribution rate for an average wage earner in OECD countries was 25% in 2017. Taking into account employer social security contributions as well, the all-in average tax rate on labor income of an average wage earner was 36%. The average VAT rate in OECD countries is 19%.
Collecting tax on relatively small amounts of “imputed” income of households does not make administrative or economic sense, but a close proxy for such a tax could be collected at the business level using an average personal income tax rate. The tax could be collected from any business, above a threshold, providing “free” digital services in exchange for user data or content, based on the value of providing such services to a country’s users.
A proxy tax on the personal income earned from providing data and user content to digital businesses, collected at the business level, has more justification than an arbitrary excise tax on certain business services as a proxy for taxing corporate income of digital companies.
Additional revenue consistent with income and indirect tax principles is possible with information reporting and/or withholding on digital intermediary companies, and with a business proxy tax for barter payments of digital platform companies.