Don’t let other countries unfairly tax America’s most innovative companies

A new tax proposal in France has drawn ire from President Trump on Twitter and provoked an investigation by the Office of the U.S. Trade Representative. The proposal, a digital services tax (DST), would tax a small percent of the domestic revenues (usually 2 to 3 percent) of a select group of large, mostly U.S. internet companies. However, these sorts of tax proposals are emerging around the world — from France, Italy, Spain and the United Kingdom to Chile and Australia. What do they mean for American businesses and consumers?

Multinational firms create a great deal of value in the global economy — including creating jobs, producing products and services people need, and investing in research that leads to innovations. To create this value, they need clear rules to follow, especially when it comes to taxes. Poorly drafted, inconsistent or onerous taxes can sharply deter investment and result in less economic growth and innovation. National governments have responded by creating an intricate web of international agreements and bilateral treaties that provide guidance while still collecting appropriate tax revenue.  

Under the current international system, corporate income is allocated to the countries where value is created. As a result, countries that import a good or service are not entitled to tax the foreign company unless it has a substantial physical establishment in their territory. As more of the economy has become digital, it is increasingly easy to “export” digital services, such as internet search, to other nations. Some nations now argue that they should be able to tax these foreign companies. 

For example, in France’s DST, revenue from selling goods or services across a platform and advertising based on user content or data would be subject to the tax. In another case, a proposal in the United Kingdom would tax only domestic revenues from three kinds of business models: search engines, social media platforms, and online marketplaces.

These nations justify targeting these business models by arguing that their consumers are the ones creating value — just as a worker in a foreign car factory creates value — and therefore they are justified in taxing the foreign companies. But, as a recent report from the Information Technology and Innovation Foundation explains, their logic is dubious at best.

In the case of user data, the users may be providing data (and their attention to advertisements), but the main source of value lies in the technology, software and customer service of the company. Where companies use data to target ads, this is best seen as a market transaction in which the user pays in data and attention rather than money. Instead of charging users for the service, the company sells the platform’s access to consumers to other companies. To say that selling ads based on data creates value for the company is like saying that paying for Perrier with pounds creates value in the UK.

When it comes to user-created content on platforms such as Facebook, Twitter or YouTube, the lion’s share is of little value to anyone but the user and a small group of friends who get to post for free. In fact, many users seldom post to social media. The few users with wide followings tend to be compensated by fame, influence and, in some cases, ad revenue. The value comes from the platform companies, which invest billions of dollars a year in research and development and capital spending to constantly improve their services.

Finally, buyers and sellers on e-commerce platforms create no more value than companies that sell to Walmart or Costco and shoppers who buy their products. Just as brick and mortar retailers create value by building and staffing stores, platforms such as Amazon create value by operating and improving upon their e-commerce software and operating warehouses.

It is not an accident that DSTs apply to only a narrow group of companies who have large revenues, and it’s no secret that most of these large internet companies are American. In fact, some foreign government officials have assured voters the tax would affect only foreign companies, not local startups. The proposals are deliberately aimed at companies regarded as too big, too powerful and too American. In addition, because they are based on a portion of the value of imports, GSTs also violate international trade agreements.

The United States is right to counter DSTs around the world. But so far, the U.S. government has made only weak attempts to oppose the implementation of these taxes. However, it has an opportunity now to address France’s proposal. French Finance Minister Bruno Le Maire said France wants to reach a deal before the upcoming G7 meeting at the end of August. The United States needs to become more forceful in protecting America’s most innovative firms, and now is the time to push back.

Joe Kennedy is a senior fellow for the Information Technology and Innovation Foundation (ITIF), the world’s leading think tank for science and technology policy, where he focuses on tax and regulatory policy. He previously served as the chief economist for the U.S. Department of Commerce and has held several other positions in government.