OECD weighs in on digital taxation saga

The Organisation for Economic Co-operation and Development (OECD) has put forward its own proposals on new tax regimes in the digital economy as the threat of fragmentation lingers.

With the proposal now open to public consultation, the OECD will make the relevant adjustments over the coming months. While this does look like a reasonable approach to creating a fair taxation landscape, there will of course be objections, perhaps from the US and those countries which cultivate the creative tax strategies which exist today.

As it stands, multinational corporations are able to shift tax payments to cheaper locations and regions, as many tax laws are defined by the physical presence of the company. With more businesses employing digital business models, this presents a greater risk moving forward. Big Tech are of course some of the biggest profiters of the inability of regulation to keep up with technological progress. In theory, the new rules will make tax avoidance much more difficult.

“We’re making real progress to address the tax challenges arising from digitalisation of the economy, and to continue advancing toward a consensus-based solution to overhaul the rules-based international tax system by 2020,” said OECD Secretary-General Angel Gurría.

“This plan brings together common elements of existing competing proposals, involving over 130 countries, with input from governments, business, civil society, academia and the general public. It brings us closer to our ultimate goal; ensuring all MNEs [Multinational Enterprises] pay their fair share.

“Failure to reach agreement by 2020 would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy. We must not allow that to happen.”

This is perhaps the biggest worry for the OECD and enterprise organizations around the world; failure to introduce new rules will lead to a much more regionalised approach. This would create difficulties for everyone involved.

The aim is of course to provide more stability and certainty in the international community, though there are a couple of elements to the proposal which are critical.

First and foremost, while these new rules will be applicable to every organization, they have seemingly been designed with digital front of mind. The proposal creates new marker definitions removing the necessity of a physical presence in a market to create tax liabilities.

“The new nexus rule would address this issue by being applicable in all cases where a business has a sustained and significant involvement in the economy of a market jurisdiction, such as through consumer interaction and engagement, irrespective of its level of physical presence in that jurisdiction,” the proposal states.

Revenue threshold levels will be created dependent on the size of the market in question. The OECD hopes this will encourage innovation while also removing the ability to dodge tax through working with third-parties and local distributors.

While this is a much more reasonable approach, designed for the digital economy, there are a few issues which need to be ironed-out, and it won’t be long before the objections to the plans are aired. One area where more thought will have to be applied are the double-taxation clauses; the OECD needs to ensure the concept of fair and reasonable works both directions of course.

What you might also see over the next couple of weeks are objections from countries like Ireland and Luxembourg who benefit so handsomely from the status quo, and perhaps the US who feels it should be the only country allowed to tax the residents of Silicon Valley.

Although there also has been some criticism levelled at the OECD for creating a proposal which favours the wealthiest countries not taking into consideration the developing regions, this is a step-in the right direction. Tax rules were woefully outdated, leaving ample opportunity for abuse. Timelines are short, but this is progress.

Facebook next on the list to face DOJ probe – report

Facebook is being touted as the latest Silicon Valley resident to face an antitrust investigation from the Department of Justice.

Alongside the Federal Trade Commission (FTC), the House of Representative Judiciary Committee and a coalition of Attorney Generals, the Department of Justice (DOJ) will be aiming to keep Facebook lawyers on their toes. From the regulatory and litigious perspective, the social media giant is having a bit of a miserable time.

Although details of the investigation are relatively thin right now, Reuters is suggesting the official announcement could be in the near future. The DOJ has already suggesting it will be launched various investigations into online platforms, though it has not been the most open with which companies it intends to focus on.

This investigation will specifically focus on competition, though it should hardly come as a surprise Facebook is facing scrutiny considering the 2020 Election campaigns are closing in fast.

While it was never definitively proved if any of the US politicians were using the platform nefariously, there have been numerous research projects and documentaries which demonstrate the power of big data and the specific reach of Facebook. Combine these two elements with a shoddy system for identifying and removing fake news, and the social media platform is a potent weapon in the battle for attention.

Facebook is likely to be the focal point of many elements of the campaigns over the next 12 months, which can perhaps explain why it is coming under so much regulatory scrutiny. This is an incredibly powerful and influential company; should it be allowed to remain in such a prominent position, especially when it has not shown itself to be the most responsible?

Although it is an aspect which has never been officially raised, some must also be asking themselves whether the residents of Silicon Valley are now more influential than the politicians of Washington DC. We suspect they are, and this will not be a position many in the capital will want to see continue.

This investigation, assuming the rumours are true of course, will focus on competition however it is a single pixel of the bigger picture. Ultimately it looks like the US Government is trying to put the shackles on Big Tech. The companies have powered the economy for years, but now they are having fundamental impact on politics and society, the line has seemingly been crossed.

US general public in favour of breaking up Big Tech

The technology industry has caught the sharp-end of the stick from point-scoring politicians in recent months, however it does appear the aggressors are representative of the people.

It should not be considered unusual to see some of the rhetoric stepped-up a level with the Democratic Presidential Candidate heating-up, though that could only be the tip of the iceberg. Recent election campaigns have seemingly specialised in grand promises, see Brexit and 2016 Presential Election, and there is little evidence sanity will be restored to the political arena.

The technology industry is an easy target for these imposing statements, and this seems unlikely to change.

According to research from think tank Data for Progress, almost two-thirds of the US general public support the notion of breaking-up big tech. And worryingly for the residents of Silicon Valley, the boundaries of political divide seem to matter very little. It does appear everyone has it in for Big Tech.

Of those who identify as in support of the Democrat party, 29% and 34% either strongly or somewhat support the break-up of big tech to encourage more competition. For Republican supporters, the numbers are 29% and 31%, and for those who identify as independent, 32% and 34% support the move.

These questions are quite generalist, but there is support to tackle the growing influence of Silicon Valley and its powerful residents. One of the reasons for this might be the highly-publicised data scandals which has dominated headlines over the last 12-18 months. The frequency of these incidents does not paint a favourable light on the ability or attitude of Big Tech.

More interesting research which builds this momentum comes from research firm Morning Consult.

Morning Consult research

As you can see from the graph above, the majority of respondents to the survey either support the continuation of the current scrutiny of the technology industry or would want to see it increased. Considering the current political position is uncomfortable for Big Tech, these numbers will not be soothing.

Interestingly enough, perhaps the biggest aggressor from the Democrat side of the political arena is gathering momentum in the battle for a nomination. Former Vice-President Joe Biden might have been the bookies favourite for the Democrat nomination for some time, though it appears Massachusetts Senator Elizabeth Warren is putting-up a very credible challenge.

Polling data from CNN suggests Warren is leading the race for the Democrat nomination, though this position could gather momentum as the process unfolds. As more potential nominees drop out of the race, votes will be dispersed amongst the remaining contenders; 20% have selected Warren as their next-best choice, with Biden only collecting 10% of the reshuffled votes.

It is way too early to make any predictions regarding the nominees or the outcome of the 2020 election, though there is another forecast worth bearing in mind. According to Real Clear Politics, a website which aggregates polling opinions from different news outlets in the US, if the election was to be held tomorrow, Warren would beat Trump, however Biden would lose comprehensively.

Again, this data has to be taken with a pinch of salt, there is a lot which can change over the next twelve months, but some will be sitting uncomfortably in Silicon Valley. Traditionally, the Democrat party has been much more politically aligned with the emerging technology segment, though Warren is one of the most aggressive critics.

Announcing her intention to compete for the keys to the White House in March, Warren has made the issue of Big Tech the focal point of her campaign. This is the big-ticket promise that we mentioned earlier in the article; Warren was one of the first to suggest the break-up of Big Tech and the reversal of acquisitions which look anti-competitive with the benefit of hindsight.

Since this point, the critical crowd has grown. The FTC is investigating Facebook for its acquisitions of WhatsApp and Instagram, as is the House Judiciary Committee. Google is at the centre of a      Department of Justice and House Judiciary Committee enquiry. The Apple App Store is facing an anti-competition probe, and Amazon’s eCommerce platform is under investigation as well.

Although all of these investigations are geared towards the activity of a single company, the outcome will set precedent which can be applied throughout the rest of the industry. If one loses, everyone in Silicon Valley is exposed to the same dangers.

Big Tech bosses might have expected the criticism and scrutiny would have continued, though these individuals might not have thought the general public would care so much.

FTC Chair kicks off race to tackle big tech before it’s too late

A race seems to be heating up in the US. On one side, government officials are looking to tackle the influence of big tech, and on the other, Silicon Valley is trying to make it as difficult as possible.

Speaking to the Financial Times, Chairman of the FTC Joseph Simons has stated he believes efforts from Facebook CEO Mark Zuckerberg to more intrinsically integrate the different platforms could seriously complicate his own investigation. Back in July, it was unveiled the FTC was conducting a probe to understand whether competition has been negatively impacted by the social media giant.

However, Facebook has gone on the offensive and Simons is clearly not thrilled about it.

“If they’re maintaining separate business structures and infrastructure, it’s much easier to have a divestiture in that circumstance than in where they’re completely enmeshed, and all the eggs are scrambled,” said Simons.

This is the issue which the FTC is facing; Facebook is more closely integrating the separate brands. From a commercial perspective, this will allow the social media giant to cross-pollinate the platforms, potentially increasing revenues and enhancing the data-analytics machine, though it will also make divestments much more difficult to enforce.

Looking across the big names in Silicon Valley, this is a common business practice. The commercial benefits are of course very obvious, but it could be viewed as a defensive strategy in preparation for any snooping from government agencies.

At Google, with the benefit of hindsight, some regulators and politicians might have wanted to have block the acquisitions of Android, YouTube or artificial intelligence firm DeepMind. These acquisitions have led Google to become one of the most influential companies on the planet, though it does appear regulators at the time did not have the vision to understand the long-term impact. Now the services are so deeply embedded and inter-twined it is perhaps unfeasible to consider divestments.

Amazon is another company some of these politicians would love to tackle, but how do you go about breaking-up such a complex business, where the moving parts are becoming increasingly reliant on each-other?

Going back almost two decades, this is not the first-time regulators have attempted to tackle an overly influential player. Thanks to dominance in the PC arena, Microsoft was deemed to be negatively influencing competition when it came to software and applications. Despite Microsoft being forced to settle the case with the Department of Justice in 2001, the concessions stopped far short of a company break-up.

As part of the settlement, Microsoft agreed to make it easier competitors to get their software more closely integrated with the Windows OS, by breaking the company into two separate units, one to produce the operating system, and one to produce other software components. This was a tough pill for Microsoft to swallow, but it was a favourable outcome for the internet giant.

One view on this outcome is that Microsoft managed to structure its business in such a way it became almost impossible to split-up. If the technology giants of today can learn some lessons from Microsoft, they might well be able to circumnavigate any aggression from the US government.

Although the FTC is stealing the headlines here, it is not the only party looking to tackle the influence of Silicon Valley.

The House Judiciary Committee’s subcommittee that deals with antitrust has already summoned Apple, Amazon, Facebook and Google to testify. This investigation is also looking at the potential negative impact these monstrously large companies are having on competition. A couple of weeks later, the Department of Justice also opened its own probe.

Of course, there are also posturing politicians who are aiming to plug for PR points by slamming Silicon Valley. This is a very popular strategy, with the likes of Virginia Senator Mark Warner and Presidential hopeful Elizabeth Warren taking a firm stance. President Trump has rarely been a friend of Silicon Valley either.

Another interest element to consider are the lawyers. Reports have emerged this morning to suggest as many as 20 State Attorney Generals will also be launching their own investigation. The threat of legal action could be very worrying for Silicon Valley, with a number of the lawyers already suggesting they do not like the way the digital economy is evolving, with the concentration of power one of the biggest problems.

The US has generally tolerated monopolies or an unreasonable concentration of power in economic verticals to a point, generally until infrastructure has been sorted, though the pain threshold might be getting to close. This has been seen with a break-up of Standard Oil’s monopoly, as well as splitting the Bell System, a corporation which was a monopoly in some regions for more than a century, into the Baby Bells across North America in the 1980s.

The internet giants will never publicly state they are participating in strategies which in-effect act as a hindrance to government agencies, but it must be a pleasant by-product. First and foremost, the internet giants will want to integrate different products and services for commercial reasons, operational efficiencies or increased revenues for example, however one eye will be cast on these investigations.

It does appear there is an arms race emerging. Government agencies and ambitious politicians are collecting ammunition for an assault on Silicon Valley, and the internet giants are shoring up defences to ensure a continuation of the status quo. This is a battle for power, and its one the US Government could very feasibly lose.

FTC warns of break-up of big tech

The technology industry has often been a political punching bag over the last 18-24 months, and now the Federal Trade Commission (FTC) is adding to the misery.

In an interview with Bloomberg, FTC Chairman Joe Simons has suggested his agency would be prepared to break-up big tech, undoing previous acquisitions, should it prove to be the best means to prevent anti-competitive activities. This would be a monumental task, though it seems the tides of favour have turned against Silicon Valley.

This is not the first time the internet giants have faced criticism, and it won’t be the last, but what is worth noting is the industry has not endeared itself to friendly comments from political offices around the world. Recent events and scandals, as well as the exploitation of grey areas in the law, have hindered the relationship between Silicon Valley and ambitious politicians.

In this instance, the FTC is currently undertaking an investigation to understand the impact the internet giants are having on competition and the creation of new businesses. Let’s not forget, supporting the little man and small businesses is a key component of the political armoury, and with a Presidential Election around the corner, PR plugs will be popping up all over the place.

Looking at one of those plugs, Democrat candidate-hopeful Elizabeth Warren has already made this promise. Back in March, Warren launched her own Presidential ambitions with the promise to hold the internet giants accountable to the rules. Not only does this mean adding bills to the legislative chalkboard, but potentially breaking up those companies which are deemed ‘monopolistic’.

This has of course been an issue for years in Europe. The European Commission has stopped short of pushing for a break-up, though Google constantly seems to be in the antitrust spotlight for one reason or another. Whether it is default applications through Android or preferential treatment for shopping algorithms, it is under investigation. The latest investigation has seen job recruiters moaning over anti-competitive activities for job sites.

What is also worth noting is that the US has a habit of diluting the concentration of power in certain segments throughout its history. The US Government seems to be tolerant of monopolies while the industry is being normalised and infrastructure is being deployed, before opening-up the segment.

During the early 1910s, Standard Oil was being attacked as a monopoly, though this was only after it has finished establishing the rail network to efficiently transport products throughout the US. In the 1980s, the Bell System was broken-up into the regional ‘Baby Bells’ to increase competition throughout the US telco market.

The internet could be said to have reached this point also. A concentration of power might have been accepted as a necessary evil to ensure economy of scale, to accelerate the development and normalisation of the internet economy, though it might have reached the tipping point.

That said, despite the intentions of US politicians, this might be a task which is much more difficult to complete. It has been suggested Facebook has been restructuring its business and processes to make it more difficult to break-up. It also allegedly backed out of the acquisition of video-focused social network Houseparty for fears it would raise an antitrust red-flag and prompt deeper investigations.

You have to wonder whether the other internet giants are making the same efforts. For example, IBM’s Watson, its AI flagship, has been integrated throughout its entire portfolio, DeepMind has been equally entwined throughout Google, while the Amazon video business is heavily linked to the eCommerce platform. These companies could argue the removal of certain aspect would be overly damaging to the prospects of the business and also a bureaucratic nightmare to untangle.

The more deeply embedded some of these acquisitions are throughout all elements of the business, the more difficult it becomes to separate them. It creates a position where the internet giants can fight back against any new regulation, as these politicians would not want to harm the overarching global leadership position. Evening competition is one thing but sacrificing a global leadership position in the technology industry defending the consumer would be unthinkable.

This is where you have to take these claims from the FTC and ambitious politicians with a pinch-of-salt. These might be very intelligent people, but they will have other jobs aside from breaking-up big tech. The internet giants will have incredibly intelligent people who will have the sole-task of making it impossible to achieve these aims.