Can Taxes Improve Advertising?
Digital sales taxes (DSTs) are on the rise, and while it’s easy to see tax as a necessary burden it’s worth considering what opportunities it creates. DSTs can be a tool for authorities to help improve data privacy, transparency and cost efficiency, by incentivizing direct collaboration between buyers and publishers.
Digital taxes have been implemented in multiple countries in recent years to meet the concern that existing international tax rules do not sufficiently reflect the digitalization of a global economy. Multinational companies generally pay income tax to the country from where they operate rather than where consumers generating the income are located.
Several countries have therefore implemented DSTs. In Europe, according to Taxfoundation.org, Austria, France, Hungary, Italy, Poland, Spain, Turkey, and the UK have implemented a DST; Belgium, the Czech Republic and Slovakia have proposed it; and Latvia, Norway and Slovenia have either officially announced or shown intentions to implement it.
Here’s how DSTs might look in the world of programmatic advertising. Let’s take an example with an agency in Turkey where the DST is 7.5%.
The agency spends 1 million EUR through a US DSP provider for 10% added to the bill, totaling EUR 1.1 million. The DST is then EUR 82,500.
The DSP now pays the media spend to the SSP (and most likely other parties as well, given the many players in the programmatic ecosystem), who will in turn pay the publisher. Let’s say that the SSP is also a US company.
If the SSP charges 10% revenue share, and assuming that the DST counts even when the payment technically goes the other way, there is another DST of 100,000 x 7.5% = 7,500 EUR.
The agency and the publisher can literally sit in the same building, yet the money can travel to the other side of the world and be gone for months before it reaches the publisher - and much less of it of course.
Taxes are Just the Tip of the Iceberg
Insufficient tax rules are far from the only concern authorities have. As enforcement of privacy laws like the GDPR is getting stricter, authorities are increasingly concerned. Ad Age explains how US senator Ron Wyden is preparing a bill to restrict data exports based on concerns about “how ad tech data can make its way into the hands of foreign governments with ill intentions against people in the U.S. [...] most of the eight firms in the inquiry provided little or no detail about the companies they send ad data to”. Perhaps unsurprisingly to many who work in the industry, those who did share information revealed partnerships in countries like China, Russia, Turkey, and the United Arab Emirates.
In Norway, the Norwegian Consumer Council recently suggested in a report to ban any advertising referred to as “surveillance-based”, as part of the fight for privacy and against uncontrolled collection, sharing and usage of personal information. In their press release they invite more to join the request for the ban:
“Together with 55 organizations and more than 20 experts, NCC is asking authorities on both sides of the Atlantic to consider a ban. In Europe, the upcoming Digital Services Act can lay the legal framework to do so. In the US, legislators should seize the opportunity to enact comprehensive privacy legislation that protects consumers.”
The Irish Council for Civil Liberties (ICCL) recently filed a lawsuit in a German court against the IAB Tech Lab for breaching privacy rules. According to ICCL director Liam Herrick, “It is unacceptable that the largest data breach ever recorded should be permitted to continue more than two years after the DPC was made aware of it [...] Continued failure will further harm citizens, and damage Ireland’s reputation.”
Curated Marketplaces to the Rescue
DSTs alone are unlikely to shake existing practices of using large international technology companies to manage programmatic trading. However, DSTs may be another weight on the tipping scale, and when combined with other important trends they may foster change. One of those important trends, in addition to privacy concerns, is increased focus on high costs and lack of transparency in programmatic advertising, which has given rise to the “curated marketplace”. Put simply, curated marketplaces are designed to allow ad buyers to connect directly with publishers instead of going through multiple intermediaries, thus creating a shorter, less costly, and more transparent value chain where money isn’t lost along the way.
Since most ad spend happens between buyers and sellers operating in the same market, curated marketplaces can ensure not only that ad budgets are spent more responsibly, but also that digital sales taxes apply to a smaller sum because most of the money doesn’t have to leave the country. If the curated marketplace is provided by a US company and that the cost is 10% revenue share, now the DST only applies to 10% (resulting in a DST of EUR 7,500 rather than 90,000 following our example above). This places certain requirements on technology providers, but they should support business models where invoicing can be handled directly by publishers or by a local clearing house.
Curated marketplaces don’t necessarily guarantee that data is stored inside a certain region, as data can technically still be shared once the technology intermediary collects it. But switching to a more local commercial model as opposed to a global one may just be a good starting point for getting tech companies to clean up their data sharing practices and ensure that, for instance, publishers showing ads to EU citizens can be sure that data is also stored inside the EU.
DSTs can therefore be a tool not just to meet the challenges presented by a global economy; it can also foster innovation that will eventually help protect user privacy, support more effective value chains, and last but not least, help ensure that money stays within borders rather than feeding giant (mainly) US based companies.