The Digital Tax Dilemma: When Big Tech's Bill Becomes Everyone's Problem
By Işın Acun
Işın Acun is a quantitative digital marketing researcher and a Ph.D. candidate at WU Vienna. You can find her on LinkedIn.
In the rapidly-evolving landscape of global advertising, digital content is king. As of 2023, digital advertising accounted for a staggering 68.8 percent of total ad revenue worldwide, with projections suggesting this share will balloon to 73 percent by 2028. But there's a problem: our international tax system is struggling to keep pace with this digital revolution.
Under current international tax rules, multinational corporations generally pay taxes where value is created or where productive assets are located, not where consumers—or in the case of the digital sector, users—are located. This creates a peculiar situation in which, through the digital economy, businesses can derive substantial income from users abroad without maintaining a physical presence, thereby avoiding corporate income tax in those foreign countries.
Enter the tech titans. In the vast landscape of digital advertising, a handful of companies dominate the market. Google and Meta, the undisputed monarchs of online advertising, collectively pocketed a whopping 57 percent of global online ad revenues in 2022. Despite raking in billions from users across the globe, their tax contributions have often amounted to little more than digital pocket change in the countries where their ads have reached audiences of millions.
To address this imbalance, the European Union proposed the Digital Service Tax (DST) in March 2018 as part of its digital taxation package. The goal was to ensure these corporations make fair tax contributions in the countries where their ads are displayed. Meanwhile, the Organization for Economic Cooperation and Development (OECD) was also working on revising tax rules for the digital economy. However, reaching a consensus proved challenging, leading various EU countries to implement their own interim solutions. Austria has proven to be a useful case study. Like many countries grappling with this digital tax disparity, Austria implemented its own Digital Services Tax (DST), a 5 percent levy aimed at ensuring these tech giants pay their fair share for the revenue they generate from Austrian audiences.
On the surface, it's a plan worthy of Robin Hood himself: tax the rich tech giants and redistribute the wealth. But in the complex world of digital economies, even the best-laid plans can go awry. The real question isn't whether the tech titans will pay—it's who will foot the bill. In this high-stakes game of digital taxation, it seems the house always wins. But who exactly is the house?
Welcome to the digital tax dilemma, where Big Tech's bill might just become everyone's problem.
The grand plan: tax the tech titans
The setup was simple: impose a 5 percent tax on online advertising services provided by companies with global turnovers exceeding €750 million and Austrian revenues of at least €25 million. The targets? The usual suspects—Google, Meta, and Amazon. To ensure these digital behemoths each pay their "fair share" in the countries where their users reside, the Digital Service Tax was designed to address a glaring mismatch in our digital age: the disconnect between where value is created and where taxes are paid. In an era where a click in Vienna can generate profit in Silicon Valley, traditional tax systems were struggling to keep up. The DST aimed to level the playing field between digital giants and traditional businesses, ensuring that the former couldn't use their borderless nature to sidestep local tax obligations.
It's worth noting that Austria isn't alone in this digital advertising tax crusade. France was an early mover, implementing a 3 percent tax on digital services revenues. Italy followed with a 3 percent levy, while Spain introduced a 3 percent tax on certain digital services. Even the UK, despite Brexit marking its departure from the EU, joined with a 2 percent tax on revenues of search engines, social media services, and online marketplaces.
These varying rates and thresholds across Europe highlight the complexity of the issue, a pan-European attempt to grapple with the intricacies of taxing a digital economy that defies traditional notions of location and value creation.
Plot twist: The tax that boomeranged
When Austria thought it had found a way to make tech giants pay their fair share, the story took an unexpected turn. Google decided to add the tax to advertisers' bills, rather than absorbing the cost themselves. Amazon Advertising quickly followed suit. Only Meta, perhaps seeing an opportunity to gain market share, chose to bear the brunt of the tax itself.
Suddenly, the DST wasn't just Big Tech's problem anymore; it became everyone's problem. Small businesses, startups, and local advertisers found themselves caught in the crossfire of a tax meant to target tech giants. The digital David vs. Goliath battle had taken an ironic twist, with David bearing the brunt of the blow meant for Goliath.
My ongoing research with Nadia Abou Nabout and Johannes Kasinger, in collaboration with the Vienna University of Economics and Business and Tilburg University, reveals a complex ripple effect of the DST on Austria's digital advertising ecosystem. Early findings indicate that advertisers on average, confronted with increased costs, are adopting cost-cutting measures to offset the tax, often at the expense of their digital reach.
Consider a real-world example: A local Vienna bakery, previously allocating €500 a month for Google Ads, now faces a €525 bill for the same service. Their solution is to reduce spending to €475, sacrificing ad impressions and potential customer reach. While these numbers might appear modest, they can have profound implications for small businesses and startups operating on razor-thin margins. The result is a reduction in ad impressions across the board, potentially leading to diminished visibility and sales for these businesses.
Furthermore, the DST isn't merely a tax on profits: it's a tax on operations. Such operational taxes can severely impede innovation, especially for startups and small and medium-sized enterprises, where every euro counts. For these businesses, the tax could make the difference between growth and stagnation. Ironically, while the DST aims to level the playing field, it may inadvertently be tilting it against the very businesses it seeks to protect, potentially stifling the next generation of digital innovators.
To understand the potential outcomes in full, let's consider three possible scenarios.
The Budget Cut: Advertisers reduce their budgets by 5 percent to offset the tax. In this scenario:
Google's profits decrease proportionally.
The government’s tax revenue increases.
The digital advertising ecosystem shrinks.
Less-effective marketing slows business growth.
The Status Quo: Advertisers maintain their budgets, absorbing the extra cost. Here's what could happen:
Google's profits remain stable.
The government’s tax revenue increases.
Advertisers' profitability suffers over time.
Other areas of business growth see reduced investments.
The Escalation: Advertisers increase their budgets to maintain their digital presence. In this case:
Google’s profits increase.
The government’s tax revenue increases.
Businesses risk decreased long-term profits.
Decreased profits suppress corporate tax revenue.
It's crucial to note that these scenarios are based on theoretical models and initial observations. While policymakers likely aimed for a scenario akin to The Budget Cut, the actual outcomes could be far more nuanced. For instance, the increased tax revenue could potentially be reinvested in local economies, supporting digital infrastructure, or programs that benefit small businesses. The tax might help level the playing field between large tech companies and local businesses in terms of tax contributions. In the long-term, this situation could even incentivize businesses to innovate and develop more efficient, cost-effective advertising strategies. However, Austrian advertisers, especially small local businesses that heavily rely on Google search and reviews, could lose their competitiveness. It's a classic case of trickle-down economics, but the effects might not align with policymakers' hopes.
The complexity of the Digital Services Tax's impact underscores a critical reality: speculation and theoretical models alone are insufficient. We need comprehensive, data-driven analysis to fully understand the ramifications of these policies. With several countries having implemented digital taxes for nearly four years, policymakers and researchers now have a golden opportunity to examine real-world data on their actual effects.
This isn't just an Austrian issue: it's a global challenge. Across the EU and OECD countries, similar taxes are being contemplated or implemented, with each government trying to solve the same puzzle of how to fairly tax a digital economy that defies traditional borders and business models. But the solution isn't as straightforward as simply imposing a tax on digital advertising. The digital economy is a complex, interconnected ecosystem where pulling one thread might unravel more problems than anticipated.
As we navigate this landscape, we need a nuanced, data-driven approach to digital taxation. Empirical research is not only valuable but essential. The path forward should be guided by rigorous analysis of real-world data, not speculative outcomes. If policymakers truly aim to create a fair digital economy—rather than simply raise revenue—then existing data is an invaluable resource that demands thorough examination.
Ultimately, the digital economy isn't a zero-sum game, and our policies shouldn't treat it as such. It's time for a collaborative effort among policymakers, business leaders, researchers, and citizens. By leveraging empirical evidence, we can chart a course for a fair, innovative, and prosperous digital future—not just for Austria, but for all global citizens navigating this digital brave new world. Only through this collective, data-driven approach can we hope to develop taxation strategies that balance fairness, innovation, and economic growth in our increasingly digital global economy.
What's next? Navigating the future of digital taxation
While the DST presents challenges, the EU's regulatory landscape isn't all doom and gloom. The Digital Markets Act (DMA) and Digital Services Act (DSA) are promising steps towards keeping tech giants in check without stifling innovation. These regulations aim to create a more level playing field in the digital ecosystem. However, when it comes to taxation, the EU's approach seems less sure-footed. Without solid empirical evidence and economic theory to back it up, taxes like the DST risk creating unintended consequences. It's a classic case of good intentions reaping negative outcomes in the complex digital economy.
As policymakers in Brussels and Washington D.C. consider their next moves, it's crucial to remember that the digital economy is highly interconnected. We need a taxation system that's as innovative and adaptable as the digital marketplace it seeks to govern. The goal should be to ensure fair contributions without hindering innovation and growth. In the fast-paced tech world, today's solution can quickly become tomorrow's outdated approach. We need a nuanced strategy that balances the needs of tech giants, small businesses, and society at large.
Future digital taxation policies should prioritize several key considerations. These include conducting comprehensive impact assessments to understand potential ramifications across all economic sectors, ensuring adaptability to keep pace with emerging technologies and business models, fostering international cooperation to avoid double taxation and ensure fairness, supporting innovation by carefully designing measures that don't stifle startups and small and medium-sized enterprises, and implementing regular policy reviews to adjust based on gathered data. By addressing these factors, policymakers can create more effective and balanced digital tax frameworks that adapt to the rapidly evolving digital landscape.