Digital monopolists not only own “factories” where we produce data for them. They also possess a common virtual space which everybody needs to go through. Something has to be done about it, says economist Jan Zygmuntowski in conversation with Maciej Chojnowski
Maciej Chojnowski: In “Digital Tax on Tycoons”, an expert report by Instrat think-tank, you have included the information that the declared turnover of Facebook Poland and Google Polska is PLN 434 million. At the same time, you have estimated that both platforms control over a half of the online advertising market in Poland valued PLN 4.5 billion. It seems to me that their revenues should exceed PLN 2 billion. How can you explain such discrepancies?
Jan Zygmuntowski*: The most important thing is where the company is registered. In the case of traditional sectors, e.g. catering, companies own premises where they offer their services and for that reason they have to be registered in a specific country in which they are also obligated to keep their accounting records. Conversely, digital platforms may be registered anywhere in the world to sell their services globally. As far as Europe is concerned, it’s usually Ireland.
Because Ireland has one of the lowest tax rates in Europe. But that’s not the only reason. For example, although Google was registered in Ireland, the company claimed that its management center and the whole intellectual value were located in Bermuda and that it could pay Bermudan taxes, which are 0 percent.
That mechanism was used to avoid taxation. As a consequence, many countries decided to create laws that would catch up with the reality. That has given birth, for example, to the concept of significant digital presence: a company doesn’t have to be registered in a specific country to make it possible to establish that it actually operates on its territory. Company’s large-scale operations in that country are enough.
In your analysis on tax collection from digital platforms you are referring to monopoly rents. What do they consist in?
Usually, the profit means a productive added value which is generated after deducting the remuneration for work and which is a return on capital. The rent, however, is non-productive because it doesn’t result from using the capital in production but from merely owning a resource whose supply is usually low, leading to a situation in which others want to get access to it. And making that resource available requires no action from its owner.
That’s why the rent has been typically associated with the land. I have a land title so I don’t have to invest or work. I can simply charge a fee for letting people access my property. The monopoly rent has been criticized even by liberal economists, for instance by Adam Smith. Capitalists reproached landowners: “You don’t do anything productive and we want resources to invest. We are the ones that create a new value.”
What does it look like in the world of new technologies?
The digital environment has developed a mechanism of such a new rent. Nowadays, a lot is said about digital colonialism, new fencing and neo-feudalism as the digital network structure is made of interconnected nodes. And if someone owns a platform through which a multitude of connections pass through, you can say that it is a sort of a digital land.
That’s what the biggest monopolists have got. Not only do they own “factories” where we constantly produce data for them and they take them away to create new products and services. They also possess a common virtual space which everybody needs to go through. That’s what the rent is about.
Are you saying that on the one hand the platforms create values and on the other hand they take them over?
Some openly say that they are used solely to intercept values. Professor Christian Fuchs claims that today our need of communication is met with the tools that observe the communication process and that are able to shape it. The capital adjusts the way we communicate to its own needs to make money of it. This is how values are extracted.
Google is a powerful company because it is has been being built by all people around the globe
Shoshana Zuboff of Harvard Business School says that we are facing surveillance capitalism. But in my opinion that approach is incomplete. In the case of business, surveillance is not to control people – that’s rather the domain of governments and not private companies. Private companies do not bother about surveillance, as their ultimate goal is to extract new data and values they create.
We can also often hear about the economy of attention, but that’s also a catchphrase, because whenever we use platform, we don’t actually give our attention but we do some work.
Does it mean that if we like a content in social media, we do some work for digital corporations?
Yes. Larry Page and Sergey Brin [Editor’s note: Google founders] were the first who understood it after defining in 1998 how the page rank algorithm should work. They found that the position of a website should depend on the number of links leading to it or, in other words, on how people rated it. They discovered that the value comes from mental work done by other people.
Their algorithm was designed to dig through all the correlations people had created between the sites and to present the results in a simplified form of a search engine. Finally, they started to collect money for the fact that they had performed that process. Google is a powerful company because it is has been being built by all people around the globe.
But today virtually every company that collects data uses this mechanism. Facebook gathers information about our reactions and knows what we like and in what offers we might be interested in. That knowledge allows it to get the money from advertisers whose adverts appear on Facebook pages and to which we react. So, essentially, we do all the work. The job of the platform is only to collect and sell data.
Do we get any value in return?
There are studies that use the willingness to pay methodology to check how much Google or Facebook is worth to somebody. People are asked how much they should be paid to refrain from using Facebook for a month. The way people think is: “If I don’t use Facebook, I won’t be able to get in touch with my family and friends or run my business.” In their opinion, they should be paid at least several thousand dollars. Theoretically, Facebook is great because it offers people more than they can contribute with their crummy data.
But that reasoning is a dead end because it includes only the status quo: “Knowing that the market is monopolized, what would you do if you lost access to the only tool you got?” What’s missing is an alternative, for example: “Imagine there is a similar platform that doesn’t collect any data about you. How much would you be willing to spend to have it?” In that case the value of Facebook could be completely different. This is why, first you need to bring about a situation where you have several options to choose from and where there is competition, so that we could give a fair answer to the question how much we get and how much we give.
Should the data we leave in the internet be our own or public property?
The private model is advocated by Jaron Lanier. His idea is to combine data privacy and ownership: data are mine and I make them available to different entities who pay me different microamounts. However, Lanier is aware of the fact that it will be difficult for individuals to be in a strong negotiating position. He suggests data owners form associations to negotiate together.
It’s a partial remedy to a problem diagnosed by economist Daron Acemoglu: the more data we have, the more we can say about people whose data are missing, because predictive capabilities allow to identify certain patterns. The Acemoglu’s team has shown that persons who value privacy the least would sell their data for the lowest price. That makes the predictive power stronger and allows to offer even smaller amounts to other groups, leading to a situation where having your own data will be of no actual value.
An alternative to that is collective and democratic data ownership. UE will be trying to create data trusts, i.e. common data spaces. Yet, to make it happen, we need to set up modern organizations that would be similar to cooperatives but that would be much bigger as they would not only consist of individual persons. They would also comprise companies, cities and agencies, e.g. the National Health Fund, so we would need a transparent democratic mechanism to manage such data.
The stock values of tech companies are very high despite the fact they do not bring that much actual profit. Why is that?
Investment funds are becoming less interested in the production of goods and more concerned about the production of data and about exchanging information because new technologies make it easier to control the reality. If I’m the owner of a ride sharing platform, I don’t have to bother my head about cars or drivers. I am just a rentier of the network sitting pretty at the very top of the pyramid.
This is how you evolve from a garage start-up in Silicon Valley to a business model the objective of which is to conquer new markets as fast as possible and control data flow through a digital platform. That’s what we mean by the network rent.
What is more, if you have data, you can develop products that are protected by intellectual property rights and you don’t have to worry about your competition. Because you have all the data that allow you to optimize the flow of people through a city, for instance.
It’s the information capital.
Yes. Those who possess the financial capital want to multiply it and value the information work. They know that it is a way to get new methods to control the society. Which brings us to the “Network Capitalism ” I am describing in the book under the same title.
Companies need to constantly expand into new areas. For example, they will be now investing in medical technologies, which will allow to directly control human life processes and obtain more information straight from human brains. But brains must be stimulated all the time to produce as much data as possible.
Insurance companies have long been using technology to determine whether or not to increase someone’s premiums. One of the Polish companies came up with a campaign: take a selfie and we will offer you a product tailored to your needs. I talked to people employed in the company that worked on it. It was about finding correlations between smoking and microwrinkles around the lips. Your selfie was used by the insurance company to establish whether you were a smoker and whether you should be put in a risk group, which translated to the amount of the premium.
Fintech conglomerates are constantly looking for areas they could expand into to maximize their profits.
Today, this problem is known both to individual countries and international organizations, such as the EU or OECD. In what way were the previous digital tax proposals different?
The OECD had been considering reforming the tax system for a long time. Finally, they decided to design a new system. But the CIT reform is a massive undertaking on a global scale. Therefore, the European Commission has developed a Digital Services Tax proposal: since we can’t solve the problem globally, let’s impose a completely new tax on digital monopolists. The bracket is 750 million euros in global income, so the tax will apply only to the biggest players.
If a French company buys ads displayed in Poland from Irish Facebook, the tax should be paid in our country
This model has been proposed as a potential EU-wide tax, but it could also be introduced in individual countries. For example, France, Czech Republic and Austria have already taken actions on their own. The Polish national interest is to develop our own solution and not to wait for the outcome of the agreement. Obviously, it would be better to do this at the EU level, but maybe when the EU realizes that it has been implemented by 15 countries, the EU will introduce the solution in all member states.
A few weeks ago, Georgette Mosbacher, the United States Ambassador to Poland, said that we shouldn’t discriminate American companies and that the model digital services tax should be developed in consultation with the OECD. Do you think that Poland is capable of making an independent decision?
Things have changed since then. The United States have broken negotiations with the OECD so a national solution is now really desirable.
But the problem does not affect American companies only! Amazon is not the biggest player on the Polish market of e-commerce platforms. It’s Chinese AliExpress, which has left all its competitors behind. Many people are not aware of that because the service has no representatives in our country and its actions are not particularly noticeable. However, its turnover in Poland has reached PLN 14 billion!
In that context, the digital tax is a small piece of a bigger puzzle. There are also VAT and customs issues because goods from China are mostly sent as samples, gifts and letters from friends. Although fifteen-odd million shipments are posted, only one out of much more than one hundred is properly taxed with VAT.
We may also expect new huge companies to appear in India and Europe. We have to monitor those too. It’s about a level playing field for all.
Different countries implement different solutions regarding the digital tax. What would be best for Poland?
The revenue tax of 7% as in the Czech Republic. Actual operating margins generated by tech companies start at 20 percent. Airbnb’s margin is 60 percent and Facebook’s margin is 40 percent. With a margin of 40%, a 7% revenue tax (exclusive of the costs and inclusive of the turnover alone) is equivalent to a CIT rate of 19%.
In our opinion, as far as Poland is concerned, it would be best to modify the legal concept of a foreign establishment with something we call a significant digital presence. Whether the revenue is generated in Poland should be determined on the basis on who was the user of a service or a product. If a French company buys ads displayed in Poland from Irish Facebook, the tax should be paid in our country. Facebook is perfectly aware of to whom the ads are shown. An ordinance of the minister might obligate all platforms to report how many views there were in our country and what the generated volume of revenues was.
What proceeds can we hope for if your solution is implemented?
If it was implemented now, next year it would translate into the revenue of one billion and into two billion in 7 years, provided we followed a markedly cautious scenario. However, these estimates base on pre-pandemic assumptions. We are sure that the digital economy is going to speed up so it might be possible to expect 2 billion zlotys earlier than in 2028.
It’s true that this sum does not look very impressive if you contrast it with the amounts earmarked in the anti-crisis schemes. But the volume of proceeds from this tax will be growing faster if compared to all other taxes. The digital economy in Poland, like everywhere in the world, is growing much more dynamically than all other sectors of the economy or GDP in general. The annual growth in e-commerce reaches up to 14 percent.
What should this money be spent on?
Firstly, it should be invested in the development of a nationwide education network, which has so far been financed by EU structural funds. The resources from these funds will be substantially reduced in the next perspective and, as we have seen during the pandemic, children have still limited access to the internet.
Secondly, we would need to increase our spending on research and development. In Poland it is incomparably lower than in other EU countries. So it comes as no surprise that Poland is at the very bottom of the innovation rankings.
Thirdly, we must increase funding for training and employment support programs, especially in the scope of digital skills. Today, this recommendation seems even more important than several months ago.
Finally, we should invest in platform cooperatives. The idea is to develop a more balanced business model that would realistically oppose to global digital tycoons and that would put more money in rather than hurt employees’ and local communities’ pockets.
What are the chances of introducing the digital tax?
The wave is coming in the right direction and it is going to be hard to stop it. Something similar happened after Edward Snowden had leaked classified information. At first, GDPR was discussed only by a handful of organizations facing the joint forces business lobbyists. But Snowden turned the tables on the corporations which couldn’t stop the discussion leading to a series of actions. I hope that this time it will be the same.
*Jan J. Zygmuntowski – President of the Management Board of Instrat think-tank and lecturer at Kozminski University. Economist interested in development issues, economic systems, and innovation and digital economy. He has gained experience in a number of organizations, including the Polish Development Fund. He provides consulting services for and supports technological projects having positive impact on the society. He is a graduate of Warsaw School of Economics in Warsaw, a G20 Global Solutions scholarship holder and a beneficiary of the FLC British Council and Møller Institute program. He is the author of “Network Capitalism”.