News, Taxes and the Internet
In an interview with the AFR published today I raised an important long-term issue for public policy: the erosion of our tax base due to the growing significance of online commerce and offshore-domiciled service providers in many sectors and markets. Many transactions which previously generated economic activity and tax revenue in Australia no longer do so.
In the case of advertising dollars once spent at Australian media outlets but now increasingly diverted abroad, a diminished local tax base is only part of the challenge created by this shift.
It also reduces the resources available for gathering and publishing news, which reduces the media’s ability to hold political, corporate or institutional interests to account. And it adds to pressure for consolidation. Scrutiny of powerful interests by a robust, fearless, professional and diverse media is fundamental to the operation of any democracy.
These changes are all part of the globalisation of the media where websites hosted overseas, be they search engines or digital newspapers, can be viewed by Australians as readily as locally hosted sites. News and advertising are increasingly globalised, borderless and in some respects state-less digital industries with which national laws and tax systems are struggling to cope.
I am not proposing any specific change to the existing tax laws or flagging a shift in Coalition policy. Nor am I suggesting that the global tax arrangements entered into by global digital businesses, such as Google, are anything but legal. The question is not whether the laws are being complied with (I assume they are) but whether they are adequate in a new, converging digital world.
As the debate currently underway in Europe over these matters illustrates, there is no quick fix or indeed any broadly agreed consensus as yet that a fix is necessary. Technology and commercial change are way ahead of the policy debate.
Historically the main focus of tax authorities in these cross-border issues of tax liability has been on physical goods and transfer pricing: Is the foreign parent (or its subsidiary to which earnings are repatriated, often located in a lower tax jurisdiction) charging the Australian arm of the business a proper ‘arm’s length’ price? Or is it marking the transfer price up so that all the profits are derived in the lower-tax offshore jurisdiction?
Compounding these questions is the global nature of the Internet. An advertisement on a Google search page may be hosted by a server located overseas, and the advertisement may be sold by a company located in Ireland – but nonetheless from the Australian user’s point of view it is as “present” on his device as an advertisement on The Australian or the Sydney Morning Herald website.
Equally the largest seller of books to Australians is Amazon – yet there is no GST levied on those sales, and no Australian tax is paid on the profits earned from them, as opposed to the taxes once paid by the Australian-based book sellers Amazon has, in many cases, put out of business.
All of this is entangled with free trade issues and Australia is by no means unique. Just about every country in the world, or at least those with open access to the Internet, is facing challenges and questions of this kind.
Nevertheless, it is extraordinary that the Labor Government recently held not one but two separate inquiries into the future of the media, but neither bothered to examine these taxation issues in any depth – despite their critical importance to the financial viability of our publishers and broadcasters of news, and the threat to Australia’s tax base.
In its determination to pursue News Ltd for claimed political bias, Labor once again missed entirely the most important challenges of a converging world of digital media.