Should Facebook be taxed 10$ per user?

Many Internet businesses (e.g., Google, Amazon, Facebook, and Alibaba) generate significant revenues. In comparison with their offline counterparts, they usually pay less taxes. To reduce their taxation burden, Internet companies establish their operations in low tax jurisdictions (e.g., Luxembourg and Ireland), conclude tax deals (e.g., in 2015, Facebook enjoyed a tax credit of GBP 11,3 million in the UK), and use other legal tax optimization techniques. Governments and experts noticed the low taxation burden on such companies and came up with proposals to increase it. Two of these proposals are examined in more detail below.

The EU plans a tax reform for online businesses

The European Commission has recently taken first steps in increasing the tax burden on online businesses by outlining three proposals for a new tax reform that would target such businesses. More specifically, the European Commission drafted plans to start (i) taxing online companies on the turnover rather than the profits, (ii) levying tax on online ads, and (iii) imposing a withholding tax on payments to online companies.

Proposal to tax Facebook users

Paul De Grauwe, professor of the London School of Economics, proposed a tax reform that (i) would levy tax on social media platforms on the basis of the number of their users and (ii) increase the tax rate applicable to such platforms. The professor argues that social media companies operate entirely information-based businesses that generate immense advertising income from almost free-of-charge sources, namely, the attention of their users. Such companies usually do not produce anything tangible but just generate and trade data.

Social media companies, according to De Grauwe, have two aspects which require a different tax approach. Firstly, the profits of such companies are generated merely on the basis of users’ attention that is free of cost. Consequently, digital businesses generate significant profits with a low number of employees, and, therefore, unbalance the economic value. By way of illustration, Facebook has a capital of USD 400 billion and employs 21.000 people, whereas Walmart has a capital of USD 220 billion and provides jobs for 2,1 million people. The second aspect identified by De Grauwe is related to the fact that people who use social media platforms give away a vast amount of personal information for free. The immense amount of data serves for marketing purposes and helps to place advertisements that would reach the targeted public – a perfect scenario for generating huge advertisement revenues.

In order to address these two aspects, De Grauwe proposes governments to tax social media, and Facebook in particular, on the basis of the number of users and increase the applicable corporate income tax rate to 50%. For example, Facebook should be liable to pay USD 10 for every active user per year in addition to paying corporate income tax at the rate of 50%. The economist calculates that the fee of USD 10 would enrich the US budget with about 13 billion dollars annually.

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