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.
8 Responses to “News, Taxes and the Internet”
How true Malcolm.
How true Malcolm.
However, unless you suggest a practical step to follow or a good policy, then it is just a point of interest, a ripple in the ocean of daily happenings.
May be an Australian digital print portal which for a modest fee will publish their advertisements and content, automatically in the overseas outlets, search engines … all at once… ?!
An issue of rising importance. Have a read through ‘Tax and the Internet II’ from the ATO back in late 1999. Under our double tax agreements, as they trade ‘with’ Australia rather than ‘in’ Australia the profits are taxable in the country of residence (say Ireland) rather than the country of ’source’ (Australia). To tax such arrangements you’ll either need to deem them effectively connected to a permanent establishment here. A withholding tax would be difficult for business to consumer transactions, but possible for business to business services. Eventually an OECD CFA agreed solution to the issue will be necessary.
You make a good point here – the difficulty is that online transactions such as those with Google Ireland are more in the nature of foreign trade in the analogue world – there is a vendor offshore and a purchaser onshore with no intermediation by an onshore agent or subsidiary or associate of the vendor.
Curious that consumption taxes like the GST are not levied at the point of consumption
[...] In an article published on his website late yesterday, Turnbull said an important long-term issue in terms of Australian public policy was “the erosion of our tax base due to the growing significant 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,” the Liberal MP wrote. [...]
AS usual a clear to the point explanation. Pity that (probably because of political / party discipline) there is not the slightest hint of possible solutions. I dare to suggest one or two possible methods to create some income for the goverment from use of the internet:
1. Create a “data tax” on data traffic to and from Australia – 0.1 cents a MB
2, As goods and services purchased overseas have to be paid usins a sevice provider (Credit card or Paypal or similar) it would not be difficult to charge GST on those amounts used for overseas purchases through the service provider.
If these ideas ar worthy of a reply I would be honoured.
regards
Hi Nessoono,
You are exactly right, but we need to be able to tax only the money that enters and exits Australia at a very small amount to be able to stop price transferring and debt creation. Please check out the following http://www.abettertax.com.au . If we tax per MB then companies will find a different way of transferring the information (mail a disk) we need to tax only the money at the point of exchange between two parties. We need to reduce the tax on employment so that companies like Qantas do not sack workers and transfer jobs overseas and Gina Rinehart does not need to bring in 1700 foreign workers.
I met with you on the 18th November 2005 after Alan Jones arranged an interview on air. I tried to explain about our tax base being eroded due to the GST giving foreign companies and imports a large advantage. The simplification of the GST was invented by two chartered accountants and a civil engineer who want to make Australia the lowest taxed country in the world. I have created a website to explain how it works at http://www.abettertax.com.au . We need a low broad based tax system to bring back investment in manufacturing, tourism and retail by creating a playing field tilted in Australia’s favour.