The Taxman Cometh For Big Data-Driven Companies

Amid soaring national deficits and debt, the powers that be complain that certain companies aren't paying their "fair share" of taxes. A new report commissioned by the French government but gaining some attention in the U.S. and elsewhere recommends changing national and international tax rules to extract more money from Internet companies in particular in order to prop up government spending.

The notion is that Internet titans such as Google and Amazon pay only a fraction of the taxes they ought to pay because the nature of their digital businesses lets them locate much of their profit-making operations in low-tax countries. The proposed solution: Tax those companies' "intensive use of data" in the country where that data is collected, Nicolas Colin, one of the authors of the controversial report, writes on Forbes.com.

The reasoning goes something like this: Internet companies collect all kinds of user data to deliver targeted advertising, customize products, make recommendations, adjust prices and drive any number of other profit-making endeavors. Those users, in effect, "become part of business operations," Colin writes, in some cases replacing employees and contractors. And because those users aren't paid like employees, their "free work" lets tech companies "reach the highest economies of scale and massive profitability," he says. Yet the taxman can't have at the full extent of those high profits when they're on the books in other countries.

"In every sector, innovative tech companies make their way into the value chain, focus on the most strategic point (usually client or user relationship), collect data, and leverage it to siphon off the profit margins from entire industries," Colin writes. "The Internet of things only accelerates this process, as it enables tech companies to grow beyond pure-playing business models and enter new markets, like payment, cars or energy.

"As the digital economy keeps growing, every sector's margin will be relocated abroad, disappearing from our GDP and depriving the government from additional revenue that should normally ensue from higher productivity."

The report's broad goal is to recommend a way for developed countries to "recover the power to tax profits made by giant tech companies" based in those countries. So who exactly are these "giant tech companies" to be subjected to this new form of data-based taxation? We hear about Google and Amazon, and it's easy enough to extrapolate the thinking to the likes of eBay and Facebook. But is Wal-Mart a giant tech company? Is Procter & Gamble? Are General Motors and Ford? Because each of them (and thousands more) is collecting many terabytes of customer and other data to fuel their businesses.

Another obvious question: What will be the process for determining the amount of taxable data? It's an idea that reeks of imprecision.

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Colin acknowledges that because "the value of data is not yet mastered, the goal should not be to tax data collection per se. Instead it should be to create an incentive for businesses that rely on regular and systematic monitoring to adopt compliant practices in favor of user empowerment and innovation." Huh? Is the proposal to tax data collection or not?

Stating that "no country can reach this goal alone," Colin urges both the European Union and global Organization for Economic Cooperation and Development to begin negotiating new tax rules and treaties. "A new definition of a permanent establishment, specifically introduced for the data-driven economy, should be based on the notion of users as co-creators of value," he writes.

Colin goes on to say that overhauling tax policy based on data collection is part of what it will take to complete the process of "creative destruction," first described by Austrian-American economist Joseph Schumpeter in the 1940s. But his analysis has the creative destruction principle exactly backward. What Schumpeter had in mind was to allow the demise of has-been companies and industries to make way for new, more creative and innovative ones, not to hamstring the most creative and innovative ones with clever new tax techniques.

A fundamental assumption of the report is that governments deprived of fat tax revenues from new economy companies are themselves fiscally responsible. They're not. In the U.S. and elsewhere, no matter the party in power, governments have shown little interest in balancing their budgets. They need to spend the money they now collect more wisely, not turn to pie-in-the-sky Internet taxation schemes.

But I digress. Even if you think governments need more revenue, this is a loony way to get it. The report's authors go so far as to compare their tax scheme to the one proposed in the Kyoto Protocol, whereby countries levy a tax on a company's carbon emissions -- as if leveraging data for competitive advantage is somehow congruous with polluting the environment. Data-driven commerce is an economic good, not a bad, even if companies misuse that data from time to time.