Data as an asset class: earning from and taxing data
We need to reset the tax regime and also find creative solutions for individuals to control and extract value from their data
The 2018 Union budget, for the first time, mentioned an intent to tax digital businesses by modifying Section 9 of the Income Tax Act. In 2016, the government also introduced the equalization levy. India could emerge as a trailblazer in defining norms to tax businesses that have large user bases without a significant physical presence in a country. There is also a distinct possibility of recognizing data as an asset class under the Indian Accounting Standards 38.
At the same time, Germany’s Federal Cartel Office (FCO) has threatened curbs on how Facebook monetizes its data. In the coming months, the European Union (EU) will also implement the General Data Protection Regulation (GDPR) which will introduce radical data-protection norms.
These developments strike at the core of how technology companies make money and reflect growing disenchantment with big tech.
In 2011, the World Economic Forum and Bain published a joint study identifying personal data as a “new asset class” leading to the “data is oil” narrative.
John Lanchester, writing for the London Review Of Books, said that “if the product is free, you are the product”. For example, anyone using Facebook is working for it. In 2014, The New York Times found that users collectively spent 39,757 years on the site, every single day, at the time. This was “almost fifteen million years of free labour per year”.
Moreover, Facebook maintains 98 data points on each user in addition to the information purchased from 5,000 data brokers. This is at the centre of Facebook’s advertising strategy—allowing it to make $27 billion from advertising in 2016. YouTube, on the other hand, is the largest music library on the planet, playing billions of tracks annually. But in 2015, artists earned less from it than they earned from sales of vinyl.
Therefore, the countries in which these people are located are “working for” these tech entities. Technology companies, on the other hand, argue that they offer hugely valuable products not just cheap but free. But free is not free as users pay for these services, not in dollars but in data.
India can become a significant stakeholder in shaping the rules of this data world. It has become data rich before it has become economically rich. With over 450 million internet users, it ranks amongst the top 5 per capita data consumption economies and is now the top mobile data user in the world.
First, taxation is a battle frontier for the digital economy. Taxes were designed for the brick-and-mortar era and communication entailed paper and telephone calls. Tax authorities are asking for a revised system in which companies could be taxed in countries where they collect and monetize data. Large internet companies such as the FAANG (Facebook, Apple, Amazon, Netflix and Google) have paid insignificant taxation relative to revenue due to archaic tax laws. Raw material (data) is extracted without payment from a source country (say, India) and then processed offshore and sold back as finished products (targeted advertisements) back to the source country. This sounds strikingly similar to the operations of the erstwhile East India company. Such an “unjustifiable fragmentation” falls squarely within recently adopted general anti-avoidance rule tax legislation in India.
Moreover, data fracking from the internet can be likened to crushing sugarcane for sugar. Data miners invest in processing power to recover useful and monetizeable data. Policymakers need to estimate average recovery rates of useful data. Depending on the data use case, varied tax methodologies can be devised. There is also a need for international coordination amongst nations.
Second, the individual should be able to monetize her data. Opt-in provisions (as with the EU’s GDPR) and greater transparency in algorithms would be a key first step in valuing data. Currently, the monetary value of data either gets left out completely from financial statements or gets expensed, thereby reducing taxable profits of tech giants. There are different experiments to reveal the price of personal data. Multinational telecommunications company Telefonica is experimenting with a platform, Aura, to allow the customer full control over data. Blockchain experiments such as Basic Attention and Brave tokens are also underway for the same purpose. Data should be established as a store of value and exchanged, gifted or inherited.
Once a counterculture darling, the internet is now seen with less utopian eyes. As technology companies morph into big tech and start resembling monopolies, scrutiny intensifies. Are companies being taxed adequately and are the users compensated fairly? Moreover, the sovereign right to collect taxes stands largely compromised.
The Cambridge Analytica fiasco has shown us how tech giants have failed to discharge their information fiduciary. They are akin to the 19th-century railroad barons in the US who dominated society, avoided taxation and operated as monopolies. That wrong was righted by the creation of the Interstate Commerce Commission (ICC). There is a need for an Internet Commerce Commission—but until such a time, domestic regulators need to step up.
We live in a world where wealth resides in intellectual property. We need to reset the tax regime and also find creative solutions for individuals to control and extract value from their data. It is critical to prevent society from becoming a winner-takes-all for digital robber barons.
Vinayak Dalmia and Shikha Mehra are, respectively, an entrepreneur and an international tax consultant.
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