Australia wonders how to tax companies cashing in on user-generated content

After already implementing the "Google Tax" in early 2017 as a means for getting more tax off multinationals operating in Australia, the federal government is now seeking a more "appropriate" method for collecting tax in a digital world where the companies offering services aren't geographically based anywhere near Australia and the services rendered are no longer always tangible.

From a tax perspective, The digital economy and Australia's corporate tax system Treasury: Discussion Paper seeks to clarify if the digitalised economy is distinguishable from traditional economy.

Posing 13 questions in total, the paper [PDF] focuses on the user, or customer, and the idea that the consumer contributes to a business model that the company isn't paying any wage for, or tax on.

One question in particular asks if user participation is appropriately recognised by the current international corporate tax system, that is, user-generated content such as search engine results and other data-generating activities, restaurant reviews and ratings, photographs shared on the internet, and the "network effect" whereby a platform gains traction after more people jump on board.

"Businesses can generate significant profits from the contribution of users, but have little or no physical presence in the country where those users are located," the paper says.

"Highly digitalised businesses can derive value from user data or user-generated content without significant physical capital, paid labour, or investment in the country where the user is located, with the result that current corporate tax laws may not allocate sufficient profits to that country."

It doesn't pose how it would tax such content, however the paper notes that some countries, for example the United Kingdom, distinguish "users" from "customers", seeing users as a key part of the supply chain of a digital business.

"The UK suggests that: Whereas customers create demand for a product, users contribute to the offering of a business; customers have a transactional relationship with businesses, while users have a 'deep and interactive' relationship with certain highly digitalised businesses; and whereas customers' role in product improvement is limited and ancillary, network effects mean that users are central to the value of a business," the paper explains.

Developed in the 1920s, the current international tax framework allocates taxing rights based on the location of physical assets, capital and labour, the source of income, and the residence of taxpayers.

But the paper says that digital businesses often rely heavily on highly mobile, intangible assets, with these assets, such as algorithms, capable of being located anywhere in the world, and usually only requiring a network to be established for them to be accessed.

"As a result a digital business may have a significant economic presence in one jurisdiction, while the majority of its profit-generating assets and labour can be located in a different jurisdiction," the paper says. "In this way, under the international tax framework and Australia's corporate income tax system, only a relatively small amount of the global profits of a highly digitalised multinational may be sourced in Australia."

The paper asks if the value of intangible assets including "marketing intangibles" -- such as trademarks and brand names -- are appropriately recognised by the current international corporate tax system, seeking to determine how the value associated with intangibles should be quantified and as a result, taxed.

Current Australian profit attribution and nexus rules focus on a business having a physical presence as an indicator of economic presence and the location of value creation. But as businesses can operate in countries with only a digital presence in Australia, they most likely won't require access to traditional physical assets such as offices or machinery, or rely on local labour.

The paper therefore seeks to determine if the current Australian profit attribution rules are fit for purpose, and if instead they should be amended to reflect "allocating taxing rights over residual profits associated with user contribution to 'user' countries, or 'marketing intangibles' to market countries".

Consultation closes on November 30, 2018, with the submissions expected to help guide future taxation law in Australia and its fellow OECD nations.

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