An advertising tax to strengthen digital sovereignty

• By Chiueh Tzi-cker

Since last year, Google has been collecting US income-related tax information from Taiwanese YouTubers and withholding what portion of their income they owe in taxes, in accordance with a US government directive. In contrast, Taipei has not been able to tax the online advertising revenue that Google generates in Taiwan.

This glaring asymmetry is a prime example of the emerging importance of digital sovereignty, through which a country asserts its rights in the supposedly borderless digital space.

Last year, Google accounted for 28.6% of the global digital advertising market, followed by 23.7% by Facebook, 8.7% by Alibaba and 5.8% by Amazon. Google’s revenue was $257 billion and its profit was $76 billion, while Facebook’s revenue was $117.9 billion and its profit was $46.7 billion.

The huge annual surplus generated by these two companies raises two questions.

First, to which governments should they pay taxes? An obvious answer would be that they pay taxes on all of their income through local subsidiaries in certain low-tax countries.

However, 136 countries agreed last year to a global minimum tax rate of 15%, which, when it comes into force next year, would render these profit-shifting tactics ineffective and significantly reduce opportunities tax evasion for Google, Facebook and other multinational companies.

The other question is which governments are allowed to tax the digital advertising profits of big internet companies. There is a growing consensus that any government has the right to tax digital advertising revenue generated within its jurisdiction, even if the company generating it is not locally registered. Conventionally, governments are only allowed to tax companies that have “significant activities” and therefore consume resources in the country.

So how can a digital advertising company that isn’t even locally registered have significant operations in a jurisdiction and therefore have to pay taxes there?

For example, Google offers several services, such as its search engine, Gmail and Google Maps, for free, but shows its users targeted advertisements created and paid for by companies around the world. Google thus sells the attention of its users to these companies.

Internet users around the world participate in Google’s advertising activities. The US company has significant operations in every country in which it has users and sells digital advertising, so governments in those countries have the right to tax Google’s local advertising revenue.

Taxing digital advertising revenue is not just a theoretical idea.

The European Commission proposed a Digital Services Tax in 2018 that would impose a 3% tax rate on revenue from online advertising and other digital services.

Although the proposal was rejected, several European states, including Austria, France, Italy, Spain, Turkey and the United Kingdom, have implemented similar taxes.

Specifically, the UK has imposed a 2% tax on income from search engines, social media platforms and online marketplaces, as long as they involve the participation of UK users.

Canada has also adopted a similar proposal, with a tax rate of 3%.

Even though the US government has vehemently opposed these taxes levied by other countries, the idea of ​​taxing digital advertising revenue is gaining traction among US state governments.

Early last year, Maryland became the first U.S. state to pass digital advertising tax law, and Massachusetts followed suit the same year with a 6.25% tax on corporate income. digital advertising services provided in the state.

Since digital advertising customers, consumers, and content creators in Taiwan are primarily taxable in the country, it would be fair for the government to tax digital advertising revenue generated domestically.

Last year, the country had a $1.8 billion digital advertising market, and Google and Facebook together accounted for at least 70% of that. Even at a 2% tax rate, the government would reap $25 million from the two companies.

One of the potential uses of this additional income would be to support the increasingly financially strained national newspaper industry, which is a major casualty of online advertising, but which is also a crucial part of a vibrant democracy. .

Chiueh Tzi-cker is a full professor at the Institute of Information Security, National Tsing Hua University.