Cover of EconPol Working Paper 41

Taxation of Digital Platforms

Marko Köthenbürger (EconPol Europe, ETH Zurich)

Tech giants such as Google and Facebook generate significant amounts of advertising income, which is mainly reported in low-tax countries. This has created a policy discussion of how to re-align the location of value creation and taxation, says author Marko Köthenbürger (EconPol Europe, ETH Zurich). The success of the business model of these digital platforms relies on the existence of indirect network effects, which are the prime reason why platforms exist and generate advertising income. To account for these effects, conventional tax policy needs to be adjusted. This includes an adjusted concept of nexus that should rely on the location of users, which generate the relevant indirect network effects. The recent EU proposal of a digital service tax goes in this direction and constitutes a policy option for other countries.

Abstract

Tech giants such as Google and Facebook generate significant amounts of advertising income, which is mainly reported in low-tax countries. This has created a policy discussion of how to re-align the location of value creation and taxation. The success of the business model of these digital platforms relies on the existence of indirect network effects, which are the prime reason why platforms exist and generate advertising income. To account for these effects, conventional tax policy needs to be adjusted. This includes an adjusted concept of nexus that should rely on the location of users, which generate the relevant indirect network effects. The recent EU proposal of a digital service tax goes in this direction and constitutes a policy option for other countries.

Citation

Marko Köthenbürger: Taxation of Digital Platforms, EconPol Working Paper 41, January 2020