Ana Paula Dourado (Lisbon) presents The Concept of Digital Economy for Tax Purposes: A Reassessment today as part of the Indiana/Leeds Summer Zoom Tax Workshop Series hosted by Leandra Lederman (Indiana) and Leopoldo Parada (Leeds):
In this paper, I will start by discussing the meaning of the digital revolution and its consequences for state sovereignty. I will then analyse the three major factors that govern the current tax policy discussion about the digital economy, in order of importance: (1) the evolution of the digital economy and its business models—or even better, essentially how the OECD described these models; (2) fair allocation of taxing rights; and (3) the internet model and approach to data protection, taking into account the knowledge discovery and data mining (KDDM) business model.
The goal of this paper is to demonstrate two things: First, that the discussion of the allocation of taxing rights under income tax at the OECD level is only prima facie related to the evolution of the digital economy and its business models. Second, that the genuine driving force is the internet model that leading states in the global order want to promote, and the role that these states grant to data protection.
Liberal societies are increasingly aware that personal data are being submitted to the activity of KDDM. KDDM is an extremely profitable activity related to the advances in artificial intelligence, and targeting foreseeability of human behaviour: human personality and behaviour are fully converted in digits, and therefore easily susceptible to manipulation and dehumanized. Besides being an extremely profitable activity, KDDM allows governments to predict, control, and repress the behaviour of their citizens and other individuals under their jurisdiction.
Human-data interaction is therefore the new paradigm, which requires that humans are at the centre of data flows. In this context, it is disputed whether individual consent, as the first condition for data protection, is sufficient to prevent abuse of the utilization of personal data. There is also disagreement over what is to be protected: individuals’ property rights, data protection as a fundamental right on its own, data as a good with inherent (economic) value, society as a whole, or even democracy—in which case, data protection is a social good.
It is herein claimed that data protection requires specific taxation of multi-sided businesses (i.e. ring-fencing). This is so, because data protection should be understood from a variety of angles: (1) as a fundamental right on its own, (as acknowledged under the European Union (EU) Charter of Fundamental Rights and the Treaty on the Functioning of the EU), preserving citizens’ individual freedoms in the social and political sphere; (2) as a collective good with profound social implications; and (3) requiring that the economic interests and benefits underlying data processing (KDDM) contribute to the community by means of taxes. Digital services taxes on the turnover of digital giants (and non-giants); taxes on digital permanent establishments; and withholding taxes may serve the purpose, depending on their design.
Specific taxation of multi-sided businesses should be designed as a regulatory tax. Such a tax includes the purpose of collecting revenue, and it is only adequate in democratic states, where individual freedoms and privacy deserve protection. The collected revenue could fund research on how to obtain international tax justice, or how to maintain democratic institutions in a globalized digital society and economy.
The so-called long-term solution, where market states would be granted taxing rights in respect of any business model, would not cover specific taxation of multi-sided business, and therefore would not play a regulatory role.