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The digital economy, tax and regulation

John Redwood, Charles Stanley’s chief global strategist, asks whether the drive for greater accountability will slow the tech boom.

John Redwood

in Features


Facebook recently opened its large new headquarters in London and made itself available to the media. It wished to talk about the big investment it is making in the UK, the large number of new jobs it is creating, and the prospects for its future as business.

It aims to have 2300 jobs in the UK by the end of next year. It is recruiting engineers as it finds the UK a good place to develop new technical solutions. It is establishing an in house incubator to help small UK digital start-up companies. Some of the journalists instead wanted to revisit issues about its tax status and the regulation of its content.

This year the large digital economy multinationals have powered a bull market in shares from New York to Shanghai. In a generally benign environment for companies to grow their turnover and profits, investors have sought out fast growth wherever they can find it. Naturally their eyes have fixed on the success stories of the digital revolution. They have turned to Facebook and Apple, Google and Netflix, Amazon and a host of smaller suppliers and competitors for some excitement in their portfolios. They have been rewarded by fast growth in revenues and by a spirited performance of the share prices.

At the same time there has been a growing chorus of criticism of these new giants. In their early years as challenger companies there was more public sympathy for the new boys on the block making inroads into the markets, prices and ranges of traditional businesses. The regulators were busy elsewhere, and even the tax authorities more concerned about older well established multinationals and their tax affairs than the place of residence or style of reporting of early stage businesses that might not be making much profit globally. More recently no-one can ignore the huge success of these new style enterprises. They are generating large revenues and many are now very profitable. The tax authorities are rushing to catch up, each wanting their fair share of the money these companies amass from their successful interaction with the paying public. The tax authorities are agreed about one thing, that these success stories should pay more tax overall. They disagree about exactly where and how these companies should pay more tax, as there is only one lot of revenue or profit in each case to tax. What is taxed in one country cannot normally be taxed in another country as well.

It is common in modern government for companies to be expected to act as socially aware institutions. They are given duties to police aspects of life by law. Financial companies have to show due diligence over money laundering so they do not assist criminals placing the profits of crime in legal accounts. Publishers and media outlets have duties in many jurisdictions to avoid assisting terrorism or hate crime and to preserve national security. When the new digital businesses established platforms for people to share pictures, messages and information they often hoped they could be neutral sites without taking responsibility for the content. Now they are larger and more powerful they have come to recognise that they do have duties to take down postings which fuel crime or generate hate. There are more difficult matters they have to discuss over so called fake news. Should a reputable digital platform allow people to put out false information which falls short of criminal activity? How responsible do they have to be for the decency and truth of everything that appears on their site? Facebook has a clear statement that it will take down anything which promotes hatred.

Some digital groups have been reluctant to place themselves as editors or censors. It would be expensive to personally monitor every posting and make a judgement on whether it passes. The more they censor the more they lose the spontaneity and intimacy of conversation for the many that some in their public likes. So far it is common to reach the compromise position with the authorities that harmful material has to be removed, and they have put in a number of special searches to identify harmful content by key words and phrases.

It looks as if the next phase of these businesses will be the recruitment of additional people to improve their ability to act as good citizens and to take responsible decisions on content without they hope losing the radical and open characteristics that attracted people to them in the first place. As these groups grow faster you would expect turnover growth to slow from the sheer logic of compound arithmetic. You would also expect more costs to be added with possible margin attrition, and for the average tax charge to rise a bit as tax affairs are more extensively scrutinised and tested.

It does not yet mean the end of the digital profits boom. There are plenty more areas of business for these companies to conquer. Their market position gets stronger as their dominant global brands attract more and more customer support around the world. The US has a tradition of splitting up large successful conglomerates when they grow too dominant. So far there is no suggestion of any such action. These are still challenger companies, and they remain evidence of a very competitive world market overall. They can grow a bit more before regulatory intrusion becomes a major worry for investors. There is some profit taking underway in tech at the moment, as US investors in particular anticipate more tax advantages from the US tax reform accruing to other traditional companies.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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