Online advertising is a vice. It should be taxed like booze and smokes

We tax consumers for using cigarettes and alcohol, so is it time for the admen to pay for their vice? Photo / Getty Images

COMMENT:

Every time you buy a box of beer or packet of smokes, you're hit with a hefty tax slapped on top of the product's price.

Governments get away with this largely because of the harm these products cause at a social level. There has to be a bit of give and take.

So what would it take for something similar to apply to those who put their money into online advertising?

There's no longer any doubt about the harm being caused by the two giant vacuum cleaners now sucking advertising revenue out of New Zealand.

More than a billion dollars was funnelled into online advertising last year, with the vast majority going directly into the coffers of Facebook and Google.

These companies have paid very little tax on this enormous revenue – and governments around the world have been grappling with how to claw back some of that money. Both companies have started reporting their revenue in the local market, but it's unclear whether this will result in higher local tax bills.

With all the focus on the evils of digital duopoly, the complicity of New Zealand's advertising community has so far been largely overlooked.

The only reason any of that money has gone into Google or Facebook is because of the willingness of local companies to invest in those businesses.

There have been brief moments, such as the aftermath of the Christchurch terror attack, when advertisers have pulled back on digital advertising campaigns, but the moral imperative has largely been ignored, on account of how affordable and popular these channels are.

So if advertisers are going to continue using digital advertising without considering their contribution to the long-term impact, why not tax them for the privilege?

A tax rate as low as 2 per cent could potentially keep as much as $20 million (based on $1b of advertising spending) in New Zealand.

Businesses opposed to the sound of such a digital tax can always shift their spending elsewhere or negotiate new pricing arrangements with their providers.

As part of its plans to revamp the media industry, the Government is mulling the idea of boosting NZ On Air to give the media more access to funding. This sort of tax could answer the question of where the additional funding could come from.

But would it work?

PwC partner Eugen Trombitas told the Herald that withholding taxes - where the payer of the income rather than the recipient pays the tax - aren't without precedent when it comes to digital media.

He says that this year Turkey made the unilateral decision to incorporate a 15 per cent withholding tax for goods and services delivered electronically.

Trombitas warns, however, that tax changes work most effectively when there is global consensus, using the GST as an example of how governments can work together to create a unified framework.

He says that when countries act unilaterally it can create complexity in terms of different rules applying across countries.

In October, the OECD announced it was working towards a framework that would allocate a greater share of taxing rights to the countries where consumers are located – regardless of the physical presence of the business.

This framework is being designed to focus on large consumer-facing businesses and will be most applicable to those operating digitally.

The OECD hopes to reach a consensus early next year and then roll out the basic architecture for the rules to be put into effect.

The problem, however, is that there's no guarantee all the nations involved will come to an agreement on what the laws should look like or how they should be applied.

There's also every possibility that the tax-shy US will decide to pull a climate change accord move and pull out of the negotiations entirely. Many of the world's biggest digital services companies are US-based, and it's difficult to see how this could work without US involvement.

The point here is that it could take years before we see any real movement in regard to an OPEC-wide framework for fairer taxation of the digital giants. In the interim, local advertisers will continue to pour money into the balance sheets of Google and Facebook with little incentive to do anything else.

It would take a bold government to impose a tax on every New Zealand business that buys ads on Facebook and Google, but this is something that could be done immediately without even dabbling in any efforts to tax the two giants.

The tax also doesn't need to exist indefinitely. If the international community does reach a future consensus and solve the enigma of extracting a fair tax from the revenue earned by the likes of Google and Facebook in this market, then the withholding tax could easily be removed.

In the meantime, every minute spent doing nothing is another dollar sent into the tech abyss.