Digital Taxation for the Digital Economy

Updated on December 7, 2019

The world’s economy is evolving. From an economy that worked on exchanging physical goods for currencies and valuables, we’re now moving towards a digital economy. A digital economy, where services and goods are bought and sold over the internet, is an economy that’s fresh and new. As a result, the laws, regulations, and legal frameworks governments are using may not reflect the current form of this economy. One such structure is digital taxation.

How does digital taxation work? What does it do to the digital economy? And are tech companies at a disadvantage? Let’s dig deeper into this subject.

The Digital Economy

The digital economy runs on digital computing technologies. The general public’s perception may be more on doing business over the internet, and that is true too. The term “digital economy” was first mentioned in a 1995 best-seller entitled “The Digital Economy: Promise and Peril in the Age of Networked Intelligence.” And somehow it stuck.

At present, the digital economy is worth three trillion dollars.
At present, the digital economy is worth three trillion dollars.

Innovating Internet

The digital economy might never have existed if not for the internet, which singlehandedly disrupted a lot of old industries while also creating new ones. The major sectors in the digital economy are:

  • devices and interfaces
  • search
  • social media
  • e-commerce

At present, the digital economy is worth three trillion dollars. That figure is higher than the GDP of the United Kingdom and around 30% of the US’s S&P 500 index. There are 3.2 billion “netizens” and 2 billion social media users. Companies spend around $170 billion in digital advertising. In other words, there’s a lot of money on it.

Amazon and others are children of  booming digital economy
Amazon and others are children of booming digital economy

Now, What’s the Problem With Taxation?

As one may expect, giant tech companies like Amazon, Google, and Facebook rake in tons of cash in revenue because of the booming digital economy.

Amazon hosts a superb platform for sellers and buyers in its e-commerce business, which can be accessed virtually anywhere in the world.

Google is a free service, but it generates earnings through search and data collection—wherever you are in the world.

Facebook, of course, is the most popular and arguably the most powerful social media network right now. Using the app is free, and it serves any purpose, whether you’re a business owner, a blogger, a freelance worker, a company, an “influencer,” or whatever. It also generates most of its profits through digital advertising and data collection. For years, their earnings flowed into their coffers without a lot of problems. But governments are starting to notice and ask, why are these companies not taxed for the truckload of money they generate?

Enter the Dragon Slayer: Margrethe Vestager

Huge tech companies like Amazon, Google, and Facebook, which all happened to be US firms, are facing a powerful enemy in Europe.

Jeff Bezos, Tim Cook, and Mark Zuckerberg meet Margrethe Vestager, who is a Danish politician currently serving as European Commissioner for Competition.

She Bit the Apple

Vestager is a Dane that is now considered the biggest foe of the Silicon Valley. And that fear is not unfounded. Vestager’s prominence in the digital taxation arena came about after she bit the apple—Vestager went after Apple Inc. and Ireland and managed to put one of the US’s biggest tech company to its knees.

Google Searching for Answers

Apart from Apple, Vestager also went after another US tech giant—Google. Vestager investigated google for using the Android ecosystem, as well as its standing in the competitive field, for anti-competitive practices. To cut the story short, Google ended up paying 4.3 billion euros as fine in July 2018, giving Vestager a decisive victory.

France’s Digital Taxation

But Vestager isn’t alone in pushing for tighter tax policies for the digital economy. France has enacted a law that funneled attention to the digital taxation arena. France has imposed a 3% digital tax on international companies that makes at least 750 million euros, or $840 million, in global annual revenue from “digital activities” accomplished in the country.

This tax is different from Value Added Tax (VAT), which targets consumers (meaning the consumers pay for the added tax), in that it targets the companies themselves. These companies include digital marketplaces like Amazon, online advertising platforms like Facebook, and personal data collection for targeted ads.

Of course, such a drastic move didn’t go without resistance. Many pointed out that this law targeted specific US tech companies like Amazon. And speaking of Amazon, the company has drawn flak from even the US government after it discovered that the company paid no federal tax though it earned a truckload of money from its e-commerce revenue.

France has imposed a 3% digital tax on international companies that makes at least 750 million euros, or $840 million, in global annual revenue from “digital activities” accomplished in the country
France has imposed a 3% digital tax on international companies that makes at least 750 million euros, or $840 million, in global annual revenue from “digital activities” accomplished in the country

Is It Really Good for the Consumer?

In terms of e-commerce and marketplaces, this digital taxation law favors brick-and-mortar shops as they have been pummeled by the online nature of Amazon and similar online shops. It would also mean better competition between Google and android rivals. It’s also a winning situation for the government coffers.

Now, one argument that pops out is that a stricter digital taxation law will push companies to charge higher fees to their patrons. For example, Amazon may charge the sellers on the platform higher fees to make up for the tax expenses. These online shops, then, will pass the price to the consumers.

Another thing to consider is that the US isn’t pleased about what France, Vestager, and the European Union has done so far regarding the issue. Trump has previously threatened to tax wines from Europe after Apple and Google investigations.

The Future of Digital Taxation

Even if Vestager is pretty solid in her stance to “restore fair competition,” she still has to face a lot of headwinds to get what she wants. The OECD (Organization for Economic Cooperation and Development) has until the end of next year to come up with a digital tax law applicable worldwide. For multinational companies, this means higher pressure and facing accusations of them paying too little and earning too high.

As of this writing, Vestager claims that the EU isn’t afraid to act unilaterally if no global-level law comes by 2020. At the same time, she claimed that the last resort would be breaking up big tech, though she prefers to use the “less intrusive” methods she has.

The European Commission and the world still have ways to go before a fully working digital tax law is gotten. Tech giants also need to come up with better strategies if they want to meet the demands of the digital economy and digital taxation. What do you think will come next?

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