By Chiueh Tzi-cker 闕志克
Google has since last year been collecting tax information related to the US earnings of Taiwanese YouTubers and withholding the share of their proceeds that they owe in taxes, complying with a US government directive. In contrast, Taipei has not been able to tax the online advertising revenue Google generates in Taiwan.
This glaring asymmetry is an excellent example of the emerging importance of digital sovereignty, through which a country asserts its rights in the supposedly borderless digital space.
Google last year accounted for 28.6 percent of the world’s digital advertising market, followed by Facebook’s 23.7 percent, Alibaba’s 8.7 percent and Amazon’s 5.8 percent. Google’s revenue was US$257 billion and its profit was US$76 billion, whereas Facebook’s revenue was US$117.9 billion and its profit US$46.7 billion.
The enormous annual surplus generated by those two companies gives rise to two issues.
First, to which governments should they pay taxes? An obvious answer would be that they pay taxes on their whole income via local subsidiaries in select countries with low tax rates.
However, 136 countries last year agreed to a global minimum tax rate of 15 percent, which, when taking effect next year, would render such profit-shifting tactics ineffective and significantly minimize the room for tax avoidance for Google, Facebook and other multinational enterprises.
The other issue is which governments are entitled to tax large Internet firms’ digital advertising profits. There is a growing consensus that any government is entitled to tax digital advertising revenue generated in its jurisdiction even if the company that generates it is not registered locally. Conventionally, governments are only allowed to tax companies that have “significant operations” and thus consume resources in the country.
So how can a digital advertising company that is not even registered locally have significant operations in a jurisdiction and thus have to pay taxes there?
For example, Google offers multipe services, such as its search engine, Gmail and Google Maps, for free, but shows its users targeted advertising created and paid for by businesses worldwide. Google thereby sells the attention of its users to those firms.
Internet users worldwide are involved in Google’s advertising business. The US company has significant operations in any country in which it has users and sells digital advertising, so those countries’ governments are entitled to tax Google’s local advertisement earnings.
Taxing digital advertising revenue is not just a theoretical idea.
The European Commission in 2018 proposed a digital services tax that would impose a 3 percent tax rate on online advertising revenues and other digital services.
Even though the proposal was rejected, several European states, including Austria, France, Italy, Spain, Turkey and the UK, implemented similar taxes.
Specifically, the UK imposed a 2 percent tax on revenue derived from search engines, social media platforms and online marketplaces, as long as they involve the participation of British users.
Canada also passed a similar proposal, with a tax rate of 3 percent.
Even though the US government has vehemently opposed such taxes levied by other countries, the idea of taxing digital advertising revenue is gaining traction among state governments in the US.
Maryland early last year became the first US state to pass a digital advertising tax law, and Massachusetts in the same year followed suit with a 6.25 percent tax on revenue from digital advertising services provided in the state.
As digital advertising customers, consumers and content creators in Taiwan are mostly liable to taxation in the country, it would be fair if the government were to tax domestically generated digital advertising revenues.
The nation last year had a US$1.8 billion digital advertising market, and Google and Facebook together accounted for at least 70 percent of it. Even at a 2 percent tax rate, the government would reap US$25 million from the two firms.
One potential use of this extra income would be supporting the increasingly financially strained domestic newspaper industry, which is a major victim of online advertising, but is also a crucial element of a vibrant democracy.
Chiueh Tzi-cker is a joint appointment professor at the Institute of Information Security at National Tsing Hua University.
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