For a number of years, France, and others, (remember, the byte tax originally proposed by the Netherlands) have been raising the idea of a digital media tax.  We can all appreciate that the internet has revolutionized the way in which business is conducted and revenues are generated.  Gone at the static business models with very identifiable revenue streams.  Current tax laws are inadequate to capture the value digital activities being undertaken by multinational technology and digital media companies are creating.  To address this issue in a more formal way, France, in early 2013, commissioned a study on the taxation of the digital economy.  And more recently the European Commission has begun a study of its own by appointing a committee of experts to look at ways to tax internet companies.

The perceived, and currently untaxed, value created by internet companies is the difference between what is taxable without the presence of a permanent establishment (very little, if anything) and the revenues or value arising from user generated data and information.  Under the permanent establishment concept, present in most double tax treaties, a company that has no physical presence in a particular country is not subject to income tax on income arising from customers or users located in that country.  Internet companies are free to locate primary revenue generating activities in low or no tax jurisdictions, and use double tax treaties and other optimization methods to reduce worldwide income tax.

One justification for taxing the internet, was set out in the French commissioned report “L’Age de la Multitude” which pointed out that in order to reach its users, collect and market the data, companies like Google, Apple and Samsung, for example, rely on the infrastructure built by local public investment.  These internet companies, use the infrastructure and local technology networks without participating in its costs, by creating jobs or otherwise contributing to the local economy.

The question being raised, is whether companies profiting from the user data collected should pay tax on that value created, where it is created.  India may be have taken the first step to creating a system to tax the internet, by imposing a duty to pay income tax on companies that have an economic nexus rather than a physical one.  Applying this concept, a company who has collected, combined and monitored users’ personal data would pay a tax on the value of that information.  Could this conundrum be resolved by requiring internet companies to register in each country in which they collect personal information from its users?  It must abide by local data protection laws anyway, registration could be imposed by minor amendments to data protection laws; or perhaps redefine the double tax treaty concept of permanent establishment to trigger a permanent establishment each time a user’s data is collected by the internet company.

There will be many more studies, reports, discussions and negotiations around how to tax the internet.  Although I would not expect imminent across the board acceptance of a tax on digital media, I do expect that a few countries will push to amend local tax laws to capture some of this value within its borders. Watch for the results of the EC study, expected to be out mid-2014, and further steps to be taken by France who may be the front runner in imposing a tax on internet companies.