Friday, June 16, 2023
Weekly SSRN Tax Article Review And Roundup: Eyal-Cohen Reviews Nadler's Taxing Zero
This week, Mirit Eyal-Cohen (Alabama; Google Scholar) reviews Hillel Nadler (Wayne State), Taxing Zero, 26 Fla. Tax Rev. _ (2023):
Companies in the technology industry that offer “free” goods and services frequently collect a large amount of user data. They use this information to show more relevant advertisements and then charge higher prices. Furthermore, user data can be packaged and sold to businesses, who can then use it to better understand customer behavior or determine the viability of a new product offering. In one case, a company provided a popular, free version of antivirus software that also collected and sold data on users’ internet browsing habits.
Zero-price transactions are common, but not unique to the digital economy. Aside from the latter, there are numerous multi-sided platforms, such as credit card companies and investment brokers, that charge high fees to their vendors in exchange for customer data on trading and purchasing habits. As the saying goes, “nothing in life is free,” so are “zero-price” products and services because consumers pay in-kind with their time, attention, or personal information.
The taxation of zero-price transactions has received considerable attention in recent years as a result of cross-border discussions on the allocation of tax revenues among countries and large multinational corporations’ use of the current international tax framework to reduce their tax burden. Digital services challenge the basic source country profit attribution rules. Digital businesses can connect with clients in source countries without having a physical presence, allowing them to reap profits from membership fees, customer attention, or user data in their home country. Furthermore, digital service providers rely heavily on intangible assets such as software, patents, and trademarks, which they transfer to subsidiaries in low-tax jurisdictions to reduce their tax burden. To counteract such tax planning, the OECD developed a multilateral approach that revised traditional profit allocation rules to allow countries whose consumers contribute significant value to certain large technology companies to allocate a portion of those companies’ profits and impose tax where value is created (for example, France’s digital services tax). However, these international tax issues and “zero-price” transaction taxes are not the same. Many businesses, including Amazon and Netflix, do not sell zero-price items. And companies that offer zero-cost services, such as Robinhood, only operate on a domestic level, with no international tax implications. As a result, tax policy debates have largely ignored the basic tax treatment of parties to zero-price transactions, which this Article successfully addresses.
Both parties to a cashless barter transaction receive value from goods and services exchanged. According to Treasury guidelines, gross income includes in-kind income realized in any form, whether in money, property, or services. The value of the goods or services received must be included in the gross income of each party to a barter exchange. However, the Article demonstrates that because the company can deduct the cost of producing its income, the inclusion of barter value received has no effect on its tax liability. As a result, the importance of taxation is found in the timing of taxing the company’s profits generated later by selling the value received in the barter. Taxation may differ if the barter transaction occurs during one tax period and the sale occurs during another. Furthermore, rates may differ if the initial barter transaction is subject to one rate and the subsequent sale of the product made with bartered inputs is subject to a different rate. For example, one rate may be applied when the barter input is capitalized by adding it to the basis of the product sold by the company later on, and another rate may be applied when the barter input can be deducted immediately as a current business expense.
Advertising-based IT firms that provide free email and search services in exchange for customers’ attention and data may deduct or capitalize the value of paid customers’ input as an expense when applied to zero-price transactions. As a result, failing to include the value of user attention and data in income has no effect on the amount of income reported by these ad-based IT companies. Thus, there is no significant difference in the overall taxes paid under such companies’ current practice of not including in-kind value of user data as income or the black-letter rule (except for the timing issue involving cost recovery as short-term (deductible) or long-term (capitalized)). Because ad-supported tech businesses utilize currently popular advertising, including the cost of consumer-provided value in income would instantaneously follow by an immediate deduction thus would not change their overall tax burden. When used to analyze customer trends and preferences, user-related data and content can be considered a long-term benefit as part of a business’s goodwill—its value as a going concern. Nonetheless, unless the ultimate output of a zero-price firm generates income in a different period or is subject to a different rate than the input received in a zero-price exchange, there will be no significant income tax consequences.
The tax consequences for consumers are quite different, though. Consumers who fail to report the value of barter transactions underreport their taxable income. In contrast to business expenses, the bartered goods and services consumers receive are a form of private consumption that is not deductible, and consumers cannot deduct it from their barter exchange income. The taxpayer must include the value received in income to provide equivalent treatment for in-kind consumption expenses. Otherwise, in-kind consumption expenses would be deducted from the tax base. Similarly, in zero-price transactions, the cost incurred by consumers in terms of sacrificing their time or private information, or accepting a lower return on investment, should be included in the tax base. Unfortunately, most consumers do not report that amount on their annual tax return.
When examining the incidence and distribution of zero-price-zero-tax subsidies, the Article reveals three effects that are difficult to control. First, the subsidy influences consumption by incentivizing taxpayers to pay in-kind rather than with after-tax cash. Second, it promotes the use of zero-cost products rather than cash products. Lastly, tax-free zero-price transactions affects how much taxpayers consume and boost such consumption of tax-free products. Market competitiveness and elasticity of demand and supply determine who benefits the most from in-kind payment tax benefits. With fewer competitors, businesses can respond by raising “prices” of in-kind products, by subjecting consumers to more ads or requiring more data to capture part of the tax subsidy. However, not everyone will benefit equally. The zero-price subsidy will primarily benefit those who are less sensitive to price changes (whether businesses or consumers). Ad-supported businesses prioritize higher-income subscribers for their purchasing power. Accordingly, not taxing zero-price goods and services subsidizes higher-income taxpayers’ consumption. Customers who value their privacy, on the other hand, will benefit less from zero-cost services.
The current tax rules impose income tax on barter transactions based on the value received by the parties in the exchange. The Article addresses the issue of zero-price transactions by focusing on the amount that would not distort the mix of in-kind and cash payments, as in-kind payments include the extrinsic value of paying with pre-tax dollars, enjoying more flexible and targeted consumption, and utilizing lower market-price cost. To remain socially optimal, the Article prescribes a neutral tax rule based on the net marginal cost of paying in kind. However, applying such a rule to zero-price transactions is problematic because customers’ consumption occurs in continuous rather than discrete units, making it nearly impossible for authorities to administer and verify the marginal cost to each individual consumer and how much they value their time or privacy.
Consequently, the Article proposes a number of other methods of taxing zero-price transactions. It examines the imposition of a direct consumer tax supplemented by third-party reporting, which will provide periodical informational returns similar to W-2 and 1099 forms. Some of the suggested customer-value proxies include using the business’s marginal benefit of being paid in-kind, the cost of zero-price commodities to customers, or “data tax” on data volume. As another alternative, the Article proposes indirectly taxing zero-price transactions by levying a tax on providers of zero-price products based on their net marginal cost or profit generated by each user, or by prohibiting the deduction of costs associated with producing zero-price products, thereby increasing the effective corporate tax rate on businesses operating on the digital platform. The Article concludes that the latter approach, which was proposed for digital transactions other than zero-price transactions, is more administratively feasible in order to ensure that zero-price transactions do not impair the tax base. The question remains—who will bear the cost of such digital zero-price tax?
Here's the rest of this week's SSRN Tax Roundup:
- Billy Abbott (O'Melveny & Myers LLP), The Anything Asset: The Tax Classification of Cryptocurrency, NFTs, DAOs and Other Digital Assets, 26 Chapman L. Rev._ (2023).
- Gabriel Aliu (Florida), Dispute Resolution Methods in Modern International Tax Law – Mutual Agreement Procedure, Arbitration and the Future (Jun. 2023).
- Reuven S. Avi-Yonah (Michigan), Pillar 2 and the Bits (Jun. 2023).
- Alessandro Bacci (Independent), A Discussion on the Extent to Which Financial Accounts Should Be Used for Tax Purposes Considering the OECD’s Reliance on the Consolidated Financial Accounts (Jun. 2023).
- Alessandro Bacci (Independent), An Analysis of the Options Available for Countering Tax Avoidance Activities Based on Financing Techniques (Jun. 2023).
- Alessandro Bacci (Independent), An Analysis of Whether Tax Systems Can Accommodate Financial Product Innovation — The Tax Issues Raised by Derivatives (Jun. 2023).
- Alessandro Bacci (Independent), Countries Wishing to Reform Their Tax System Must Be Sure That Their Proposals Follow Both International Trade Law Principles and International Tax Law Principles (Jun. 2023).
- Alessandro Bacci (Independent), The MLI May Preserve the Essentially Bilateral Nature of Tax Treaties and Embrace a Strong Anti-Avoidance Approach to the Application of Treaty Provisions (Jun. 2023).
- Alessandro Bacci (Independent), The Practical Problems of Taxing Capital Gains: The US Approach and the New Zealand Approach (Jun. 2023).
- Alessandro Bacci (Independent), The Sensitivity of Tax Law Highlights the Artificial Nature of the Corporation and Challenges the Corporation’s Separate Identity in Myriad Ways: The US Approach and the UK Approach (Jun. 2023).
- Stephen L. Curtis (Cross Border Analytics, Inc.) & Reuven S. Avi-Yonah (Michigan), Microsoft's Cost Sharing Arrangement: Frankenstein Strikes Again, 178 Tax Notes Fed. (2023).
- Stephen Daly (King’s College), Tax Systems - Adaptability and Resilience During a Global Pandemic, & Bus. Res. (2023).
- Stephen Daly (King's College) & Martin Hearson (London School of Economics), Global Britain: Influencing Tax Policy, King’s L. J. (2023).
- Tatiana Falcao (World Bank), Proposal for a Supplementary Law to Establish a Carbon Tax in Brazil (Jun. 2023).
- Tatiana Falcao (World Bank), Proposal for Change of Constitutional Amendment 45/19, Brazil: Environmental Tax Reform Proposal (Jun. 2023).
- Angelo Golia (U. of Trento), Data Capital Tax within the Puzzle of (Economic) Digital Constitutionalism: Questions for a Comprehensive Research and Policy Agenda (Jun. 2023).
- Miriam González-Serrano (Mexico), Fiscal Qualities of Contractors in Hydrocarbons- Critical Review of Its Legal Effectiveness (Jun. 2023).
- Victoria J. Haneman (Creighton U.), 529 Plans and School Choice, Tax Rev. (Forthcoming 2023).
- Liu Hern Kuan (Singapore) & Vincent Ooi (Singapore), Made Crypto Losses? Don't Assume the Taxman Will Subsidise You, The Straits Times, 4 June 2022.
- Jinyan Li (York U.) The Future of the Corporate Form in Income Tax: A Case Study of Canada (Jun. 2023).
- Belisa Ferreira Liotti (Vienna U.), Taxpayers’ Data Protection: Do International, Regional, and Domestic Instruments Guarantee Adequate Rights in Tax (A)EoI?, 50 Intertax 138 (2022).
- Raymond Luja (Maastricht U.), The Foreign Subsidies Regulation: The Challenge of Notifying Non-Selective Tax Expenditure, 8 Competition L. & Pol’y Debate _ (2023).
- Stefan Moderau (U. of Tübingen), Taxing Away the Takeout Trash? Evidence from a Local Packaging Tax in Germany (June. 2023).
- Daniel Olika (Florida), A Critique of the Tiebreaker Rule for Tax Residence of Companies under the MLI, 1 Revista Tecnica Tributaria 135 – 153 (2023).
- Daniel Olika (Florida), Tax Multilateralism in Regional Economic Communities (Jun. 2023).
- Vincent Ooi (Singapore), An Automation Tax- Adopt With Caution, Austaxpolicy (2022).
- Vincent Ooi (Singapore), Tax Challenges in Debt Financing Involving Digital Tokens, 17 Capital Markets L. J. 564-582 (2022).
- Vincent Ooi (Singapore) & Daryl Loy (Singapore), Virtual Worlds, Real Money: Tax Issues in the Metaverse, Business Times (2023).
- Leopoldo Parada (Leeds), The Future of Research in Tax Law in L. Parada (ed), A Research Agenda for Tax Law (Edward Elgar, 2022)
- Leopoldo Parada(Leeds) and Manel Bondi (Digital Cooperation Organization), Response to the UN Resolution A/RES/77/244 on Promotion of Inclusive and Effective Tax Cooperation at the United Nations (Jun. 2023).
- Ashiqullah Pardisi (Independent), Accounting, Ethics and Public Policy: An Annotated Bibliography 2007-2022 (Jun. 2023).
- Sol Picciotto (Lancaster U.), Lawyers as Constructive Ideologists of Corporate Capitalism: The Legal Framing of Software (Jun. 2023).
- Diane M. Ring (Boston College), Testimony for Hearing 'Cross-border Rx: Pharmaceutical Manufacturers and U.S. International Tax Policy' (Jun. 2023).
- Navodhya Samarakoon (Treasury), The Effect of the Closure of the Double Irish Arrangement on the Location of U.S. Multinational Companies’ Profits (Jun. 2023).
- Natasha Sarin (Yale) & Mark J. Mazur (U.S. Treasury), The Inflation Reduction Act’s Impact on Tax Compliance—and Fiscal Sustainability (Jun. 2023).
- Laura Snyder (Association of American Residents Overseas, hereunder “AARO”), Extraterritorial Taxation #1: How it Has Evolved (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #2: How It Is Experienced (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #3: Education and Advocacy (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #4: Why Nothing Changes (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #5: Refuting the Rationales (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #6: No Compelling Governmental Interest (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #7: Inherently Suspect (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #8: More Violations of Equal Protection (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #9: Forcible Destruction of Citizenship (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #10: Violating Human Rights (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #11: Deference or Constitutionalization? (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #12: It's Not About Paying Taxes (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #13: Other Countries Have a Duty to Act (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #14: Revenue Neutrality Makes No Sense (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #15: Taxing in Respect of Rights (Jun. 2023).
- Laura Snyder (AARO), Extraterritorial Taxation #16: Cook is Ripe for Revisiting (Jun. 2023).
- Charles Ho Wang Mak (Robert Gordon U.), Navigating the complexities of section 100A: a look at the future of trust taxation in Australia, 29 Trusts & Trustees _ (2023).
- Deborah A. Widiss (Indiana- Bloomington), Privatizing Family Leave Policy: Assessing the New Opt-in Insurance Model, Seton Hall L. Rev. (Forthcoming 2023).
- Edward A. Zelinsky (Cardozo) & Doris Zelinsky (Independent), Brief of the Petitioners-Taxpayers Edward A. And Doris Zelinsky in DTA # 830517 and DTA # 830681(Jun. 2023).
- Libin Zhang (Fried Frank), Four Tax Questions for ChatGPT and Other Language Models, 179 Tax Notes Fed. 969 (2023).
https://taxprof.typepad.com/taxprof_blog/2023/06/weekly-ssrn-tax-article-review-and-roundup-eyal-cohen-reviews-nadlers-taxing-zero.html