Here’s Why Your Facebook ‘Likes’ Are Key to a Global Tax Debate

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Benjamin Stupples London Penny Sukhraj London

By Ben Stupples

At your local supermarket, you don’t help to bake the cakes, bread, or cookies on sale.

Yet when you click ‘Like’ on a Facebook page that provides new cake recipes, or search through Alphabet Inc.’s Google for nearby bakeries, your actions create value for these businesses.

The data these digital companies collect from your online activity, and then monetize through displaying targeted advertisements, is fundamental to their business models. In 2017, advertising spending made up 98 percent and 86 percent of Facebook and Alphabet’s global revenue, respectively.

Thus, the way you interact with these online businesses is a lucrative commodity. But the profits derived from your internet activity can often go untaxed in your local country. Assessing where to tax digital companies, due to their lack of physical presence, has created problems for governments.

The “development of certain business models has challenged our understanding of how and where companies create value,” the U.K. Treasury said in a March 13 policy paper on the taxation of the digital economy. These companies partly rely “on the engagement and participation of users.”

That reliance on user participation highlights how internet-based businesses outstrip traditional tax laws. It also explains why governments have been introducing individual measures to make online companies pay “fair” tax as countries work to modernize the international tax framework.

“Digital taxation has been floating in the background since 2015, but the debate around this has now moved up a notch,” Chris Sanger, EY’s global head of tax policy, told Bloomberg Tax by email. The increased pace is now “disruptive” and may pose a risk to technological innovation, he added.

2020 Target

Aiming for a global solution in 2020, the OECD warned March 16 in an interim report on the taxation of online companies that countries are currently divided on introducing temporary measures.

Pending global agreement, more governments will probably take “uncoordinated” action in the wake of countries like Italy and India enforcing revenue-based taxes, the report said.

Governments are opting for revenue levies on digital companies as sales are easier for tax authorities to pinpoint than profits as user-generated value in their jurisdiction.

Ahead of 2020, the European Commission proposed March 21 a 3 percent sales tax on social media and search engine companies, and online platforms like eBay Inc.

A commission memo on the proposal said it would protect the EU’s competitiveness, raising as much 5 billion euros ($6.2 billion) a year for member states. It added that the levy would remain in place until member states achieve more wide-reaching action to reform how countries allocate and tax digital companies’ profits. The levy applies to businesses with annual EU revenue of more than 50 million euros.

Dominic Stuttaford, global law firm Norton Rose Fulbright’s head of tax for Europe, Middle East, Asia and Brazil, described the EU’s proposal as the “first wave” of measures targeting digital businesses.

“This is of course only a proposal and there is yet much to come in the negotiation stages so that the Commission can get it right,” he said in a March 21 statement. “There will also be international cooperation with the G20 and OECD, which will be important to maintain a global consensus.”

U.S. Warnings

With Facebook, Inc. and Alphabet all headquartered in the U.S., the country’s leaders are unlikely to agree on global policy efforts to introduce further taxes on digital businesses. No such policy was included in the country’s recent tax reform.

Responding to the Organization for Economic Cooperation and Development’s report, U.S. Treasury Secretary Steve Mnuchin said he opposed any attempt to target internet-based companies, calling them some of the “greatest contributors” to the U.S. economy.

Similarly, the Computer and Communications Industry Association, a tech lobbying group based in D.C., rejected the European Commission’s proposal for a temporary revenue tax.

“We encourage the EU to seek international tax reform through the OECD rather than pursuing discriminatory, unilateral actions with risks to Europe’s digital economy and international trade relations,” Christian Borggreen, CCIA’s Europe vice president, said in a March 21 statement.

A spokesman for eBay, meanwhile, told Bloomberg Tax the company is “carefully” reviewing the commission’s proposals. The San Jose, Calif.-based business looks “forward to being a constructive partner to policy makers and tax authorities as these debates continue,” he said March 22.

Ahead of the OECD’s final report, PwC U.K.’s head of digital tax Alenka Turnsek warned of the need for “comprehensive engagement between businesses and governments to reach a global consensus.

“A co-ordinated, long-term approach will be crucial to prevent businesses facing the prospect of having to navigate a mish-mash of different tax rules,” she said in a March 16 statement.

Google’s press office didn’t respond to Bloomberg Tax’s request for comment.

In a March 22 email, a Facebook spokesman cited the company’s December 2017 announcement to book advertising revenue locally rather than via its international headquarters. Set for completion next year, the change will give governments further transparency on Facebook’s sales structure.

Future Policy

In the past six months, the U.K. has been one of the most active countries on tax policy related to the digital economy, publishing a policy paper in November 2017 and updating it this month.

In addition to proposing an EU-style sales levy, the U.K. has stressed the importance of user-generated value for companies like Google and Facebook, and explored where else it may apply.

For the tech giants of Silicon Valley, the U.K. Treasury said in its policy paper, updated March 13, that users can:

  •  Be a core part of businesses that sell advertising on an online platform populated by users’ content;
  •  Form a significant part of online platforms’ brand strength, such as through rating content; and
  •  Via collected data, boost search engines’ efficiency and influence the inquiries of other individuals.
“It follows that, for some types of digital businesses, users can be seen participating in a non-traditional value chain and performing supply-side functions that would historically have been undertaken by the business itself,” the Treasury said in its updated paper.

It also highlighted digital content providers, like Apple Inc.’s music streaming service, as an example of user-generated value—a signal of the direction for the U.K.’s possible digital economy tax policy.

Moreover, due to the digital economy’s “rapid pace” of innovation, the Treasury cited a need to review the latest business models in the sector, such as those based on virtual reality.

“They are looking at the whole market issue” of the digital economy, Bill Dodwell, Deloitte’s head of U.K. tax policy, previously told Bloomberg Tax. “What’s the profit-making apparatus here? That’s what the government’s looking at, and it’s trying to pick up every instance of it,” he added.

EY’s Sanger, meanwhile, stressed global debate on the digital economy is not about companies’ avoiding tax. Instead, it focuses on which governments tax online businesses’ profits, he said.

“Despite the continued interest in this topic, an international agreement and approach appears a long way off,” he said. “But regardless of this, businesses still need to prepare for the prospect of change and remain agile in this new environment.”

To contact the reporter on this story: Ben Stupples in London at

To contact the editor responsible for this story: Penny Sukhraj at

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