Nº 4 2015 > Global Symposium for Regulators
The Impact of Taxation on the Digital Economy
The GSR Discussion Paper by Professor Raul Katz of the Columbia Institute for Tele-Information examines the impact of taxation on consumption, investment and the different players in the digital economy (users, telecom operators, Internet Service Providers (ISPs) and Over-The-Top (OTT) players). It presents a typology of different taxation regimes in the digital sector and examines trends in taxation, fiscal policy and the potentially distortive effects of taxation (including double taxation, taxation asymmetries and the impact of location). It concludes by presenting lessons learned, best practices and recommendations for fiscal policy.
The digital economy is understood by some to be a global public good or, at the very least, certainly a global platform. The Paper makes an important contribution by examining the variety and impact of national approaches to a global good.
The Paper concludes that, overall, there are two opposing approaches in digital taxation policy — one is the goal to maximize revenue collection, based on steadily increasing revenues from digital products and services. The Paper notes that some governments see Internet access as an attractive source of revenue. Telecom users, telecom operators, ISPs and content/service providers can hence be subjected to a number of taxes, including: sales tax, equipment levies, custom duties, and VAT (Figure 1). Conversely, some governments consider that lowering taxes on the digital sector of the economy triggers spillovers that are often larger than the taxes foregone. For example, broadband consumption taxes (or ’Internet Access Taxes’) are not uniformly applied across countries. And in some countries where broadband is considered to be a critical need, some regulators have chosen to reduce, or exempt, broadband service from any consumption tax or customs duties. For example, Colombia has decided to exempt digital devices from import duties and even sales taxes for underprivileged citizens. Proponents of this approach argue that a virtuous circle can be established, whereby the loss of tax revenue from reducing tax rates could be recouped from greater usage (Figure 2).
With regard to digital goods and services, the picture is more complicated. There is still little consensus among policy-makers as to which categories digital goods fall into, or whether digital goods should even be taxed at all. Current debates focus on various questions:
- What are the appropriate levels of taxation on telecom equipment purchased by operators, or hardware purchased by consumers?
- How should Internet sales or e-commerce transactions be taxed? The volume of e‐commerce as a proportion of retail trade is increasing steadily around the world, but in many cases, sales taxes are not commonly paid on goods purchased via the Internet.
- How should consumption of digital goods be taxed? In most cases, payment of video streaming subscriptions from providers like Netflix or Apple TV does not include taxes.
- Should the providers of digital platforms, such as Google and Facebook, be taxed in the countries where revenues are generated or can they benefit from international rules that allow them to benefit from corporate tax exemptions in certain locations?
- Should Internet service providers pay taxes the same way as telecom carriers? Indeed, the Discussion Paper notes that the recent debate over net neutrality in the United States actually has taxation implications — the “reclassification” of ISPs as common carriers under Title II of the Communications Act of 1934 may mean that the requirement by the FCC that all telecom carriers contribute 16.1% of interstate telecom revenues to the Universal Service Fund (USF) applies.
In those countries where certain players in the digital ecosystem are not taxed, or they are subject to taxes or exemptions at different rates, tax asymmetries and other distortions can prove an important source of competitive advantage for some players over others.
In principle, taxation should seek to be neutral and equitable across all sectors of the economy. A distortion occurs when a change in the price of a good resulting from taxation triggers different changes in supply and demand from what would occur in the absence of taxes. The Paper examines the distortive effect of taxes in the digital eco‐system at three levels:
- Potential disparities in tax burdens imposed on telecom operators, compared to other players in the digital eco‐system(e.g. social networks, digital advertisers).
- Taxation asymmetries among global players in the digital sector (between countries).
- In-country taxation asymmetries between the telecom/ICT sector and other providers of other goods and services.
The rich and informative Paper presents an excellent overview of some of the issues involved in taxing the growing digital economy. It concludes that in developing fiscal policies, governments need to consider the trade‐off between revenue generation and possible adverse effects to the development of the digital sector. Answers to this question are likely to be country‐specific, based on countries’ circumstances and policy trade‐offs between revenue generation and the potential negative impact on the development of the digital sector, as well as the telecom/ICT market environment.
The Discussion Paper is available at: www.itu.int/gsr15