Taxing the cloud: introducing a new taxation system on data collection?

Cloud computing services are increasingly hosted on international servers and distributed amongst multiple data centres. Given their global scope, it is often easier for large multinational corporations to effectively circumvent old taxation schemes designed around the concept of territorial jurisdiction and geographical settings. In view of obtaining tax revenues from these online operators whose business is partially carried out in France, the French government recently issued a report emphasising the need for new taxation rules that would better comply with the way value is generated in the digital economy: at the international level, it is suggested that taxation should be calculated according to the place of interaction with endusers; at the national level, the report suggests to introduce a transitory tax on data collection in order to promote innovation and encourage good online practices.

small fraction thereof is actually accounted for when establishing the amount of taxes paid to the French government.For instance, Google alone is suspected to have achieved in 2011 a turnover between 1.25 and 1.4 billion euros (most of which is derived from advertising activities on the internet) but only paid a little bit over 5 million euros as corporate income tax to the French government.1 ">http://www.fftelecoms.org/sites/fftelecoms.org/files/contenus_lies/brochure_ott_4_pages.
pdf Digital taxation has become an important concern for many governments, in Europe and beyond: countries such as Germany, the United Kingdom and the United States have been trying to tackle the issues of tax avoidance and profit shifting for many years, both at the national and international levels.More recently, the issue has been specifically addressed by the French government, which sets out to start a "war against tax piracy" in the cyberspace through the introduction of a new tax -which, if implemented, would effectively put France at the frontline in terms of digital taxation regulations.
In this regards, a series of verification procedures have been undertaken against large multinational groups suspected to avoid compliance with French tax regulation by billing most of their customers from abroad, so as to evaluate the amount of money owed to the French state.In addition to Microsoft -which has been requested to pay 52.5 million euro for tax evasion -the main targets are Google, Amazon, Facebook and Apple (the so-called "GAFA gang") suspected to pay only a very limited share of corporate income taxes.
In June 2011, the National tax inspection authority and French customs conducted a raid on the headquarters of Google France.After having examined several emails, invoices, and other contracts with a view to determine the amount of value-added tax (VAT) and corporate income tax which had not been paid by the company between 2008 and 2010, it appears that the U.S.
company might have to pay damages for more than 100 million euros.Few months later, it is the turn of Amazon to be investigated.After thorough analysis, the Tax inspection authority asked the U.S. company to pay 198 million euros of tax arrears, interests and penalties related to the false reporting of foreign sales in France.Finally, the French tax inspection authority conducted a search in the Paris headquarters of Facebook, in order to double-check the veridicity of the company's tax returns declaration.Like the other two companies, Facebook is suspected to divert most of its revenues through Ireland in order to benefit from laxer tax regulations.
This practice, generally referred to as the practice of tax avoidance -as opposed to tax evasion, consists in using the taxation system to one's advantage, so as to legitimately reduce the amount of due taxes without infringing the law.This practice has become widespread on the internet, due to the ability for large online operators to circumvent an aging taxation scheme that is designed around the concept of territorial jurisdiction and geographical settings.Tax avoidance is in fact much easier to achieve in the context of cloud computing services, hosted on international servers and distributed amongst multiple data centres which are not necessarily located in the country where taxes are due.
Thus, in view of obtaining proper tax revenues from online services provided by international corporations whose business is partially carried out in France, the French government has commissioned a study (analysed in detail below) to find out how to effectively deal with internet giants that are suspected to constantly experiment with new tax optimisation schemes with the goal to reduce tax contributions to a minimum.

FRENCH REPORTS ON NEW TAXATION RULES FOR THE DIGITAL ECONOMY
After a first report filed on June 27, 2012 by French Senator Philippe Marini (Chairman of the Finance Committee) presenting the roadmap for a neutral and equitable taxation scheme for the digital world, the French government decided to address the question of "digital taxation" (fiscalité numérique) more in depth.In an interview with Le Monde, the French Minister for the digital economy, Fleur Pellerin, explains that "as Europe is increasingly turning into a tax haven for large multinational corporations", the French government intends "to restore a balance between online and offline operators".Thus, following Marini's report, the French Ministries of Finance and Economic Regeneration commissioned a study aimed at fighting tax piracy in the cyberspace.The findings of this study have recently been presented in the form of a comprehensive (and slightly controversial) report -published on January 22, 2013 -which emphasises the need for new taxation rules at the national and international level.2Indeed, the advent of internet and digital technologies challenged the traditional approach to corporate taxation -whose rules have rapidly become obsolete with the advent of cyberspace.
Many online operators rely on innovative business models with large productivity gains that do not, however, generate any revenue for the states they operate in.According to the authors of the report, this is due to three important factors: Firstly, the rapid and constant evolution of online practices and activities makes it difficult to identify specific points of stability on which to levy a tax.Secondly, these online practices systematically dissociate the place of establishment (of the company providing the service) with the place of consumption (by the user of that service).The wealth generated by these companies is, therefore, increasingly difficult to locate, and, consequently, ever more difficult to tax.Thirdly, given that most of the large online operators are either vertically or horizontally integrated, they can split their businesses into several companies so as to separate data collection activities from the activities that actually generate profits.Thus, it becomes easy for these companies to transfer their profits into offshore tax havens, where they can benefit from divergent tax regulation.Such is the case of Google, which in 2011, managed to save up to 2 billion US dollars in corporate income taxes by shifting 9.8 billion US dollars in revenues into a Bermuda shell company.
The report proposes to reform taxation systems to better comply with the way value is generated in the digital economy: at the international level, it is suggested that taxation should be calculated according to the place of interaction with end-users; at the national level, the authors suggest to introduce a transitory tax on data collection in order to promote innovation and encourage good online practices.

TAXATION ACCORDING TO THE PLACE OF INTERACTION
International tax laws require corporate profits to be taxed according to the law of the country in which the corporation's headquarters are located -which is often the country with the lowest taxation rate.Sometimes, other countries can nonetheless levy corporate taxes when the company enjoys a "permanent establishment" in that country -a concept defined by the OECD Model Tax Convention, which constitutes the basis of corporate taxation in most EU member states.
Yet, given that the concept of "permanent establishment" did not keep up with recent developments of the digital economy, its redefinition was suggested in order to better comply with the specificities of a "data-driven digital economy".Based on the new role of users as cocreators of value in the supply chain, the notion of "permanent establishment" should not only account for the physical location of the servers on which the services are hosted, but also for the place of interaction with end-users3 -which is where the process of value creation actually takes place.
The problem is, of course, that international taxation schemes are based on international tax treaties and mutual agreements amongst countries.The implementation of such a proposition will thus necessarily require a long period of negotiations both at European and international level.

TRANSITORY TAX BASED ON DATA COLLECTION
In the meantime, the authors of the report suggest to intervene at the national level, in order to better account for the role of data in value creation by introducing a "transitory internet tax" based on the collection and processing of user data.
Indeed, all internet intermediaries (and cloud computing operators in particular) have the ability to collect a large variety of user data -be it data provided voluntarily by users, data derived from the systematic monitoring of user activity, or data involuntarily left behind while surfing the internet.Such data can be exploited in many ways: to provide target advertising, to make purchase recommendations, to better customise a product, to increase customer loyalty and trust, or to apply price discrimination -all activities that might lead (directly or indirectly) to greater customer satisfaction and higher profitability.
The authors claim that data -and especially personal data -"are the goldmine of the digital economy", and should therefore be regarded as one of the main drivers of economic growth.
Just like goods, data can be stored, aggregated and reused at a later time, so as to provide new value in the long term.

INTERNET USERS AS CHEAP LABOUR
More and more, on the internet, as users become an integral part of online business operations, the line between consumption and production begins to blur.Large social networks, such as Facebook, Youtube or Google+ strongly benefit from "the free and voluntary contribution of internet users" -which includes both personal data and user-generated-content.Yet, given that they are not paid for, user contributions (described by the authors as "free labour", as opposed to "crowdsourcing"4) constitutes a strategic source of revenue for many cloud operators and online intermediaries.Indeed, by leveraging on data produced by user activity, online operators can provide many of their services for free, while nonetheless making significant profits through the commercial exploitation of such data.Besides, user contributions can easily be capitalised upon to either boost advertising revenue or to increase the user-base for other complementary (paid) services.Traditional taxation schemes, however, generally fail to take these practices into account.
Taxing the cloud: introducing a new taxation system on data collection?
Internet Policy Review | http://policyreview.info 2 May 2013 | Volume 2 | Issue 2 Taxing the cloud: introducing a new taxation system on data collection?
Internet Policy Review | http://policyreview.info 3 May 2013 | Volume 2 | Issue 2 Taxing the cloud: introducing a new taxation system on data collection?