France’s Ministry of Culture has issued a report that recommends taxing Internet advertising revenue earned by such companies as Google, Facebook, AOL, Yahoo and Microsoft, based on the use of their services in France.
France would then use those supplemental tax receipts to support local online cultural content, content creators and artists. Suggested projects include digitizing books, creating new Internet portals that could aggregate content, and creating new watchdogs to make sure artists are compensated for work downloaded from the Internet.
France could raise as much as US$29 million — or 2 percent of revenues — a year from the proposed tax, according to news accounts. French President Nicolas Sarkozy is reportedly set to ask Budget Minister Eric Woerth to look at ways to implement the tax.
Opening the Door
Such an amount is minuscule, compared to Google’s overall ad revenue in Europe, the report noted.
That may well be true, but such thinking — which could easily be adopted by other revenue-hungry governments — is one of the many objections critics have raised about the proposed tax.
“Naturally, should every country in the European Union — and the rest of the world — all implement their own “small percentage” tax extraction, Internet commerce, content and creativity will be curtailed,” Raymond Van Dyke, partner with Merchant & Gould, told the E-Commerce Times. “Content owners must be protected, but direct government subsidies [through taxation] is a dubious means of achieving this end.”
Who Will Bear the Cost?
It is highly unlikely the companies would absorb the costs of such taxes themselves, Daniel Ruby, research director at Chitika, told the E-Commerce Times.
“A major problem I see with France’s proposed taxation of online ad revenues is that the cost, as it usually happens, will be pushed onto publishers rather than absorbed by Google or Yahoo or Facebook, etc.,” he said.
“Small- to mid-sized Web sites that generate the bulk of their income from ads will be the ones affected most negatively, as their revenue share and CPC earnings will likely be cut so that the ad networks can keep a viable business model going,” explained Ruby.
Essentially, that is what occurs whenever a government imposes fees on a large enterprise, he said. The fees wind up being paid by the end consumers, not the corporations being targeted.
“Another possible unintended consequence will be more invasive advertising,” Ruby added. “As revenue share of small publishers and CPC goes down they will do whatever they can to ramp up more clicks, which means more invasive and possibly deceptive advertisements.”
How Will It Be Implemented?
Then there is the difficulty of actually calculating the tax owed by each company and then collecting it, said John C. Havens, VP of social media at Porter Novelli, and author of Tactical Transparency: How Leaders Can Leverage Social Media to Maximize Value and Build Their Brand.
“This tax would set a dangerous precedent and be very difficult to fairly collect” — at least, based on ISP traffic, he said. “For example if I am looking at Facebook from my New York City office, Facebook might not necessarily know that is exactly where I am, as the server might be based in New Jersey.”
The fact that so many Internet providers are shifting operations and content to the cloud will make the task doubly difficult, he added.
Where Does It End?
Another issue to consider is the large number of industries that have been disrupted by the Internet, said Ryan Radia, an analyst with the Competitive Enterprise Institute. These include print journalism, travel and procurement. In all cases, there have been both winners and losers.
“Instead of trying to save old business models by using taxes, it is better to let the forces of creative destruction lead to new content development,” Radia told the E-Commerce Times.
“Another possibility would be to gather representatives from Google, et al, with representatives from the creative community and government in one room,” Havens suggested.
“What France is pointing out — the erosion of support for local artistic industries — is a problem,” he acknowledged. “Getting all these minds in one room to come up with a way to address the problem could lead to all sorts of new ideas and endeavors.”