Analysis: Digital Turnover Taxes are a Bad Idea

November 2, 2018

Paul MacDonnell, Executive Director, Global Digital Foundation

The European Commission and Others are Weighing Digital Services Taxes

Last March the European Commission announced a proposal for a “Digital Services Tax” (DST) to be levied on the turnover, rather than the profits, of “digital” businesses. Governments would impose a DST at a rate of 3 per cent on revenues from “digital services” on companies with revenue of at least €50 million in the EU and €750 million worldwide. Specifically the tax would be levied on: online advertising revenues, seller / buyer fees to transact via online intermediaries / marketplaces, and revenues from the sale of user data. The Commission has said that it expects the levy to raise €5 billion per year, a figure equivalent to 0.08 per cent of all EU tax revenues in 2016.

Inspired by the Commission’s proposals, a number of countries around the world are lining up to propose similar taxes on digital businesses whose operating models, they say, threaten their tax base and place bricks and mortar businesses at an unfair disadvantage. Notwithstanding its imminent departure from the EU and, therefore, urgent need to negotiate trade agreements with other major economies, notably the U.S., the UK has announced that it intends to implement a 2 per cent turnover tax on U.S. tech giants that it says will raise $1.9 billion. Similar proposals are now emerging from countries in the Asia-Pacific, including India and South Korea, and from countries in Central and South America.

The premise behind this wave of proposals is that digital businesses enjoy the benefits of countries’ infrastructure and legal systems while contributing little of the tax revenue needed to sustain them. Beyond their emotional appeal—who is against “wealthy corporations” paying their “fair share” of tax?—they are unsupported by any real evidence.

This note is divided into four parts.

Part 1 examines the European Commission's argument for a digital services tax. This is:

  1. The “intangibility” of digital “assets” supports business models that enable firms to avoid paying corporate and local taxes.

  2. The growing market-share claimed by online business in some sectors is a threat to countries’ tax bases.

  3. Value is generated by digital businesses at the point where they collect customer information.

  4. Because digital customers generate “value” then using their country of residence as a measure to levy a corporate turnover tax is an appropriate response that reflects the nature of these businesses while meeting the fiscal needs of countries where they trade.

The essential assumptions made at each of the four stages of this argument are questioned and shown to have no foundation.

Part 2 outlines reasons why challenges arising from the taxation of multinational digital businesses are common to all—digital and non-digital—multinational enterprises and that these challenges are subject to reforms already agreed, or are currently under discussion, in international fora tasked with overseeing global tax governance.

Part 3 argues that the digitisation of businesses, so that they evolve to become virtual or partly-virtual equivalents of their bricks-and-mortar counterparts, and the advent of multi-sided digital platforms, require neither a new definition of value creation nor a new system of taxation. A turnover tax on businesses that are online versions of regular businesses is a tax on efficiency with no more justification than a tax on businesses because they use electricity.

The core argument of this note, however, is a response to the attempt to impose a DST on multi-sided platforms. It is set out as follows. In their targeting of digital platforms with a minimum global turnover policymakers have misrepresented platforms’ true social and economic role. Digital platforms often comprise multiple sides where only one side constitutes the digital business itself. The other sides are usually non-profit and non-commercial information exchanges which generate value only to the commercial side when acquired data is used to generate profit. Until they generate value to the commercial side all of the value of the non-profit sides accrue to non-paying users.

A social network, for example, should not be considered a single business but a hybrid multi-sided platform where one side constitutes a community-created network that facilitates user communications, another side the platform owner’s own advertising business, and a third side advertisers who wish to turn the community network’s users into their customers. The point of value creation for the business is the point at which these interactions generate profit. As with existing businesses corporate tax should be levied on realised profit generated by the interaction between the three sides of the platform.

Finally, the conclusion argues that the Commission’s proposals directly contradict its own Digital Single Market Strategy. Its argument that digital technology facilitates tax avoidance has no basis. Furthermore its assertion that value is created at the point of interaction between the users of digital platforms has not been thought through, particularly in terms of what constitutes a digital business. The debate at the OECD about the future of corporate taxation in a digital world is important. But by jumping the gun on its outcome the European Commission and countries such as the UK are unilaterally breaking an international consensus on corporate taxation practice with potentially damaging consequences.

1: The Argument for a Digital Services Tax

Does the “intangibility” of digital “assets” support business models that enable firms to avoid paying corporate and local taxes?

The Commission alleges that the “intangibility” of digital assets make tax avoidance easy.

There is little evidence to support this assertion. Genuine tax avoidance measures referred to by the Commission, such as transfer pricing and tax avoidance strategies that allow companies to assign the value of their production process to low-tax countries, are already being addressed through OECD guidelines. The UK Treasury has concluded that the challenge of global corporate tax avoidance is not peculiar to digital businesses but shared by all global industries. At the same time these are issues that are under consideration by the OECD. Most major enterprises including airlines, banks, and large retail outlets have significant online presences. For example in the UK over 80% of holidays are booked online while airlines, such as Ryanair, conduct most of their business online. Leaving aside the fact that the European Commission doesn’t properly define “digital assets” there is no reason to think that moving a business online facilitates tax avoidance.

The Commission argues (p. 2) that "transfer pricing rules are used to attribute the profit of multinational groups to different countries based on an analysis of the functions, assets and risks within the value chain of the group." It then asserts that the different "characteristics" of digital companies allows them to avoid tax by hiding their sources of value creation which "creates a distortion of competition and has a negative impact on public revenues". No empirical evidence is offered to support this claim.

The Commission’s analysis of what constitutes a “fair share” of taxation for digital platforms seems to confuse profit with stock market valuation. In fact the Commission’s own estimates for effective corporate tax rates do not reflect the high effective rates paid by most corporations in Europe and the US, including digital businesses—with the average tax paid by digital businesses considerably exceeding the Commission’s estimates.

Studies do not support the idea that the effective corporate tax rates (ECTRs) of digital and non-digital businesses differ in any way that reflect the use of digital technology. The variability of ECTRs is explained by the sector firms operate in, their location, and whether they are subject to double taxation. Digital companies like Alphabet (10-year effective rate at 26%), Netflix (26.29%), Ebay (33.87%), and Amazon (48.93%) can be compared with sectors such as food and beverage, automobile and parts, telecommunications, utilities, industrial goods and services, and banking where ECTRs average below 20%.

The average ECTRs of digital businesses in the B2B and B2C markets is, in fact, greater than European Commission’s estimates for the EU by between 20 to 50 percentage points. The Commission's analysis focuses both on revenue and market capitalisation of a small number of big companies. Furthermore, the profit of digital companies shows no correlation to ECTR.

The argument that by not paying corporate tax in countries where they have customers digital businesses benefit from legal systems and infrastructure they don’t pay for is not valid. Non-domiciled companies pay business rates for offices and distribution centers, they pay postage and courier charges, they collect and remit VAT, and they pay company social security levies for their employees.

Finally, the author of the report relied upon by the Commission in its conclusion that digital businesses pay too little tax has, himself, indicated that the Commission has misinterpreted the data.

Is the growing market-share claimed by online business in some sectors a threat to countries’ tax bases?

There is no evidence that the advent of the digital economy is eroding Europe’s tax base. In fact growth in overall tax revenue in the EU over the past 20 years has been 119 per cent, higher than the growth in GDP at 103 per cent. Furthermore growth in corporate tax revenue has been 147 per cent, forming a growing proportion of overall tax revenue from income tax, levies, and VAT. If EU Member States were able to significantly increase the corporate tax paid by digital platforms it would make no perceptible difference to Europe’s public finances.

A European Parliament Report in 1999 highlighted the, theoretical, potential for electronic commerce to facilitate both illegal tax evasion and legal tax avoidance. However the Commission’s own suggestion that digital technology provides opportunities for tax avoidance is not reflected in its proposal for the taxation of very large digital platforms based on turnover. There is no evidence that digital technology has affected the rates of corporate tax they pay.

Does user-contributed data constitute taxable value-creation?

The Commission asserts that user-contributed data to digital businesses constitutes, of itself, value creation that should be taxable. This observation has no foundation. First, data is, of itself, worthless until it is either aggregated and sold at a profit or until it is used to support profitable commercial transactions. Furthermore, consumer data is not scarce and can be used multiple times by any number of competing organisations. Most of the profits of Facebook or Youtube, for example, derive from advertising that is targeted with the use of data-driven knowledge about user preferences and interests. Profits earned from this revenue are taxed just as profits made by newspapers or television stations who sell advertising are taxed. The fact that the design and content of newspaper or TV advertising is improved through research into markets and reader / viewer preferences has no bearing on where or how the firm creates value. The same is true of online user data. In fact it is the Commission’s assertion that digital assets are “intangible” that allows for its sleight-of-hand argument that the unremarkable practice of collecting user preferences on a social network constitutes a user-contributed source of value creation. The point of taxable value creation is the point at which the company makes a profit from its activity.

2: The tax challenges facing digital platforms are those of all multinational businesses and measures are in place or under OECD review to address them

Are there problems with the global corporate taxation system?

The global system of corporate taxation presents a number of challenges. These include manipulation of profit attribution where companies have artificially assigned activities in their business processes to low-tax jurisdictions thus avoiding taxes in areas of principle activity. The OECD has led measures to counter these practices. On the question of base erosion the OECD has recommended that a significant physical presence in a country, for example a fulfilment warehouse, should constitute a permanent establishment thus rendering the enterprise liable for corporate tax. There is no evidence that these challenges are any greater when it comes to assessing the corporate taxation liabilities of digital business.

Without justification, DSTs threaten to treat firms unequally based on their arbitrary assignment to a category of “digital” businesses. The measures proposed go far beyond the principle of targeting abuses of the international taxation system and constitute the creation of an unlevel playing field and an extra layer of tax that penalises efficiency.

Europe should listen to its own policy experts

Germany’s Scientific Advisory Council, a government think tank that advises the German Finance Ministry has stated its opposition to the Commission’s proposals on two grounds: First the Digital Services Tax is a departure from accepted international rules on corporate taxation and runs counter to the OECD BEPS (Base Erosion and Profit Sharing) project which is based on intergovernmental cooperation. Second, the use of the DST as a “quick fix” is likely to compromise some measure of flexibility in EU Member State tax rates. Other problems identified by the Scientific Advisory Council include: the possibility of double taxation in the country where the company is domiciled—where the authorities can already collect sales taxes; the likelihood that a turnover tax like DST will be levied on consumers; and, finally, the discriminatory nature of a tax that could be levied against companies that are not yet profitable.

The Commission’s proposal rests on a rush to judgement that will do more harm than good. These questions include: Who benefits from multi-sided platforms? When does a business become “digital”? How is value created in a digital business? At the same time, the Commission is ignoring both its own proposals for a Common Consolidated Corporate Tax Base (CCCTB) that promises to eliminate tax competition between Member States, and the OECD’s inquiry into the taxation of digital enterprises which is, as yet, unpublished.

3: The reality of digital businesses in general and multi-sided digital platforms in particular

What is a digital business?

The question of what constitutes a “digital business” is at the centre of the taxation issue. If, as the European Commission’s Digital Single Market strategy aims to achieve, a significant number of European enterprises become digital businesses then can we expect a digital turnover tax, or its successor, to be applied to them also? For example, retail banks are, in Europe, well on the way to becoming digital businesses, as are companies like IKEA who have significant online sales and which collect significant quantities of user data. Taxing businesses on the basis of turnover merely because they are digital is akin to taxing them because they use electricity. The technology may transform their efficiency but it doesn’t fundamentally change the nature or location of value creation within the enterprise.

It seems, in fact, that the Commission isn’t aiming at digital businesses per se but rather at digital platforms. Here we have to consider the nature of platforms.

Digital platforms, like Facebook or Youtube, are advertising businesses that provide communications / content services in exchange for market-research data.

But doesn’t the way digital platforms gain and use data make them qualitatively different from regular bricks-and-mortar businesses? It doesn’t. Multi-sided digital platforms’ data gathering functions are no different from those of independent market research or data collection companies—which have been around for nearly 100 years. Their only innovation is that they acquire data in exchange for the provision of services and service enhancements. This is less a quantum leap into a different category of enterprise than a gain in efficiency within an old business model.

Data is an input, just like any other, into a business. Taking social networks as an example, there is no case for treating consumers’ country of residence, or their contribution of data in exchange for communications services as a locus of value creation—and, therefore, nexus for the purposes of taxation—any more than if data about consumers was purchased from a specialist market research company. This is because the value that is created at the point of user interaction with a social network does not accrue to the business but to consumers themselves who are able to communicate with other users on the network. This arrangement can be construed as an exchange between users and the platform owners. But it arises from the side of the multi-sided platform that is created by users themselves and not by platform owners who, in fact, derive no benefit from it until they are able to monetise user data in profitable transactions. Under the current regime the profits from these transactions are subject to tax in the normal way.

A social network, like Facebook is an advertising business created by its owners, a voluntary network, co-created by its users, and a market-intelligence / research data collection organisation which generates value both directly and indirectly. The value of users’ data is only directly realised when it is used to sell targeted advertising to third parties and only indirectly realised when its commercial customers transact profitable transactions using this data. At no point can the model be said to constitute tax avoidance.

Facebook is an owner of advertising space that acquires consumer data directly from consumers by offering free social networking services. A television company that prices and sells advertising airtime based on information about users that it has purchased from Nielson, the global measurement and analytics company, is no different.


The European Commission and countries that are planning to implement a DST are jumping the gun on consensual OECD deliberations about the future of corporate tax in a digitised economy. The potential consequences of unilateral action are that it will confuse digital businesses, causing them to reduce their investment, deter enterprises from moving their business online, lead to overlapping and contradictory tax obligations—including double taxation, and provoke retaliatory measures from the United States. Furthermore in making this proposal EU policymakers are contradicting their own Digital Single Market Strategy.

Coming on top of recent EU actions such as a decision, unsupported by any credible evidence, to fine Google €4.34 billion for allegedly preventing competition against Google search on Android mobile devices, approval for an internet copyright law written for the benefit of incumbent European publishers against the interests of consumers, and attempts to outlaw “fake news” and “hate speech”, a worrying picture of European policymakers’ approach to digital technology is emerging. Policymakers in the EU have developed a simultaneously pessimistic and optimistic attitude to digital technology. Optimistically, the Commission campaigns to promote a Digital Single Market. Appropriating the futuristic our-world-will-be-transformed enthusiasm of Silicon Valley it inevitably (because this competence belongs not to it but to enterprises and Member States) glosses over the fact that, done properly, digitising Europe’s economy will be slow, expensive, invisible and, above all, mundane. The pessimistic yang to this optimistic yin is its view of digital platforms like Amazon, Airbnb, Facebook, eBay, and Youtube as would-be monopolists, threatening both economic stability and privacy. This view exists within a Bermuda Triangle where sensible policy thinking around major digital platforms in Europe begins to dissolve.

Why? Digital platforms often threaten perceived vested interests within Member States, such as trade associations representing threatened incumbent industries, like newspaper publishers, or taxi drivers. The Commission has no power to walk its digital talk by driving pro-consumer digitisation within Member States against these vested interests. Armed only with competition and privacy powers it becomes a man with a hammer who sees every problem as a nail. Rationalising the gravitational pull of Europe’s corporatist national cultures as concern about competition, privacy, and base erosion it casts the Union’s most disruptive and competitive enterprises, themselves enablers for millions of small businesses who would challenge regulated incumbents, as dangerous privacy-violating monopolists.

Digitising Europe’s economy will take many years and cost billions of Euro both in investment and training. As this investment proceeds the relative importance within the overall digital economy of platforms like Facebook, Amazon, Google, and Youtube will diminish. Their current role as multi-sided platforms is two-fold. First they are enablers for millions of enterprises of all sizes across the EU. Second, they constitute hybrid enterprises, embodying both commercial and voluntary dimensions. They should not be taxed on the basis of their voluntary side—data given in return for services. They should be taxed, like other enterprises, on the basis of their profits. A tax on their turnover is a direct attack on their role in unlocking capital, spreading innovation, and promoting affordable services through the world.

Policymakers in Europe need to accept that digitising Europe’s economy will be a long, expensive, and mostly unglamorous process. They need to stop grandstanding about American tech companies, stop living in a world where “big business” is always the bad guy, and start seeing what they should be doing to help, not hinder this process.


Views expressed in this article are those of the author and not those of the Global Digital Foundation which does not hold corporate views.


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