Taxing data in the digital economy is set to become far easier
In its interim report on how to tax the digital economy, the OECD noted that: “Advances of technology in the web 2.0 era are most dramatically felt in social networks supported by advertising revenue where the implications for the tax system are most apparent”.
The blockchain effect
Blockchain tech is well-positioned to fundamentally change how digital services are built, used and monetized. More and more social networks that rely on active user participation will be forced to move over to governance____text in bold systems that are decentralized, network-centric and based on the blockchain. As the technology advances, digital business models built on web 2.0 will become defunct. What does this mean for the way data accumulates and generates value?
As Metcalfe’s law2 explains, and as supported by Facebook and Tencent data,3 in the networked digital economy, value is created by network participants.
Supported in the OECD report
This also aligns with the OECD’s conclusions. In its interim report on challenges to the BEPS project brought about as a result of digitalization, the OECD summarizes the situation as follows: “User activity and participation statistics are key indicators for such businesses. Annual reports and initial public offering documents often disclose information concerning trends regarding active users, and present metrics such as average revenue per user (ARPU) for different geographical areas to indicate the different monetisation rates and potential”.
Handing over data freely
Ours is the ‘lost generation’ that handed over information carelessly — and for free — to attention merchants. Writing for the London Review of Books, John Lanchester says consolidate a new internet-age dictum: “If the product is free, you are the product”. For example, anyone using Facebook is actually working for Facebook. In 2014, the New York Times found that humans were spending 39,757 collective years on the site, every single day. This is “almost fifteen million years of free labor per year”.
This is the basis for Facebook’s ad strategy — generating US$27 billion from advertising in 2016, up by 57 percent from the previous year. YouTube, on the other hand, is the largest music library on the planet, playing billions of tracks annually, but in 2015, artists earned less from YouTube than they earned from sales of vinyl.
Users or members create value
For tax policymakers, it is important to consider that it is now the users or the network members who create value, not the network platform owner. It is therefore these individuals, these ‘value-creators’ who should be the main concern when it comes to determining the corporate tax base. Companies such as Uber, Facebook, Google, AirBnB, Amazon and Alibaba that famously own no taxis, real estate, inventory and create no content, yet dominate their respective industries, illustrate that capital requirements for production are not only distributed but owned by the platform workers themselves. Value is created at the fringes of such platforms.
Network participants can only be taxed if they earn income for the data and the user-generated content they have been contributing for free to those who own and control these platforms.
Data as a store of value
Blockchain experiments are underway to transfer ownership of data back to those who generate it. What follows is a world where data is established as a store of value and becomes a tradable commodity — to be exchanged, gifted and inherited.
This is being enabled by the advent of new technologies. Distributed computing systems are powered by a combination of decentralized consensus protocols, game theory and cryptography and have proven that networked digital platforms don’t have to be monopolized by tech giants like Facebook and Google. Blockchain and algorithms / consensus protocols can be used to decentralize governance and redistribute profit among users and network participants in source countries. In other words, there are alternatives to centralized, profit-oriented intermediaries — the Facebooks, Amazons and Googles — that have become household names.
Blockchain-based social ecosystems are built on paradigms that put the user in the centre and recognize that it is the users that create data, that the data created belongs to them and, correspondingly, any value generated from this data accrues to them. This is all made possible by native blockchain tokens or decentralized advertisement (ad) tokens. These tokens are used to compensate and reward the users for the data and content they contribute to social networks, and also for their attention to advertisements.
Blockchain tokens
At its root, it is simply a points system. However, because this points system is blockchain-based, the points can be traded on markets as tokens.
People buy and sell these tokens, and many hold them in anticipation of increased purchasing power. The rewards people earn are tokens that have market value and are readily tradable.
Micropayments or subscriptions (in the form of tokens) allow content creators to receive payments directly from their audiences/readers for the internet traffic that they generate, without any third-party payment intermediaries and their attendant fees and delays. For the first time, thanks to this technology, it is economically (and technically) viable to digitally send 10–15 cents halfway across the world.
Blockchain experiments are underway to transfer ownership of data back to those who generate it. What follows is a world where data is established as a store of value and becomes a tradable commodity — to be exchanged, gifted and inherited.
The political landscape
In terms of how this idea fits within a wider regulatory and political landscape, blockchain-based social network platforms that rely heavily on user participation are much in alignment with OECD/BEPS emphasis on allocating taxing rights to value-creating economies.
The GDPR and blockchain are clearly not compatible with respect to the GDPR’s requirement that individuals be given the ability to revise or delete their personal data. However, there are ways to split the data structure in such a way that the citizen’s data is stored off-chain and only referenced on-chain.4 In this way, the immutable data record is only a record of transactions involving data but not the data itself. And through this technique, GDPR’s objectives might be met in substance if not form.
To summarize, the mediating function of centralized technology services offered by today’s proprietary platforms can now be managed using blockchains, cryptography and game theory in such a way that user’s privacy and monetization is at the core. Source countries will enjoy their fair share of taxes as users in their countries will be directly compensated for their data and contributions online.
Download the full "What to Tax?' publication here.
by Shikha Mehra
Shikha Mehra is a Senior Research Associate, OP Jindal University. Shikha holds a faculty position at Jindal Global Law School, designing and delivering courses on Tax and Property Law. She actively researches and writes on topics such as taxation in the digital economy and application of OECD (BEPS) guidelines to the Indian context.
by Barry Larking
Barry has built up some 30 years tax experience of which around half has been acquired at KPMG. After graduating from Oxford, Barry qualified as a UK solicitor, and has since worked for many years in the international tax field and is now specialized in Dutch and EU tax law, in particular in relation to the financial sector.
