The value in data: taxing the value of data

The technological advancements of the last two decades have resulted in major shifts in the way businesses generate value and it is clear that the international tax rules have struggled to keep up. One consequence of a truly global digital economy is that a company can be physically located in one jurisdiction whilst generating value from customers or ‘users’ around the world. The traditional international tax rules which focus heavily on tax residency and physical ‘establishment’ as the primary basis for attributing taxing rights feel dated when faced with the reality that ‘value’ is not necessarily generated in a HQ location but in the multiple places around the world where an organisation accesses markets or harvests data. Given that internet users generate data with huge statistical and financial value, a further consequence of the shift to online sales models is that, as well as being the customer, internet users are now, in many cases, also the ‘product’.

This article in our series on the value in data focusses on how the value of data currently translates to tax revenues and what changes we might see to international tax rules as jurisdictions attempt to harness the value of data to increase tax take.

Current position

The UK does not generally tax the value of data as it accrues. The value inherent in data is usually only subject to tax when that value is realised: when revenue is generated from the sale or license of an asset whose value is underpinned by data. There are sound tax principles behind this approach. A ‘dry’ tax charge (being a tax liability which crystallises at a time when there are no corresponding cash receipts to settle the liability) can place a business in a precarious financial position.

The UK tax rules took a step towards recognising the value of user data following the introduction of the Digital Services Tax (DST) in April 2020. DST is calculated by reference to certain revenue from social media services, search engines and online marketplaces as a consequence of UK user participation. Whilst it does not tax data directly, user data is an integral part of both how the relevant revenues are generated and how the taxation of those revenues is assessed and collected.

The international community is also taking a hard look at aligning taxing rights with value creation. This has culminated in the OECD’s “two pillar” proposals, the first of which will ultimately result in the repeal of national DSTs and their replacement with a suite of international and domestic tax rules which will force large multinational businesses, whether tech companies or not, to allocate more revenue and taxing rights to the ‘market jurisdictions’ they are selling into. This is likely to more closely align tax liabilities with the key places in which businesses are collecting and/or using customer data. There is no suggestion that these proposals should trigger liabilities by reference to the unrealised value of data generated in a market jurisdiction. Ultimately, the user data in a jurisdiction must either link to sales revenue or must otherwise be monetised in some way before a tax liability will bite.

Does this go far enough? 

The OECD’s recent work, although not yet complete, is regarded as a huge leap in the world of tax. It is no mean feat to secure buy-in from 136 nations to rules which, collectively, will set a global minimum rate of tax and also implement a brand new suite of principles and tax concepts which move away from the entrenched residency basis of taxation. 

Even so, the “two pillars” have already been criticised by some for not going far enough. Certainly, even more radical solutions to the complex problem of fairly taxing the digital economy have been mooted. Some of these ideas have specifically focussed on the taxation of data itself. Two of the more innovative ideas are:

A “Data Dependency Tax”

A group of Californian scholars have contributed to a White Paper issued by the Berggruen Institute which builds on a ‘data dividend’ concept suggested by Californian Governor Gavin Newsom in 2019. The motivation behind the proposal is that a data-driven economy does not exist without a data-generating public and the public should receive their fair share of the benefits from this economy. The original ‘data dividend’ idea proposed that payments should be made to individual data subjects for the use of their data. The White Paper acknowledges that the value of data primarily comes from the aggregation of data generated by large groups, rather than from any one individual so suggests that the price paid by organisations using data should be in the form of a tax for the greater public good. The proposal envisions the creation of “public data trusts” that would contain data for public use. Companies that contribute their data to public data trusts would get a break on their data taxes. A side-effect of a tax based on data dependency would be a harder look by organisations at what data they really need to hold and a move away from collecting data ‘just in case’. There is merit in exploring this approach and the ancillary societal advantages it could bring. However, the fundamental challenge remains: exactly how should ‘data dependency’ be measured and how should the ‘value’ of data be assessed? Even if an acceptable valuation method could be crafted, is a ‘dry’ tax charge, levied in the absence of actual cash receipts, justified?

Taxing the storage of data

A tax on the amount of data that a company harvests and stores could be calculated by reference to fees paid to cloud-based storage services or data centres. This would be quite a blunt instrument: it would not recognise that not all data is of equal value. The same issue around taxing unrealised value would also arise. On the plus side, this form of tax could result in an alignment with environmental taxation principles: a focus on the amount of data stored and/or the use of data centres could have the effect of indirectly reducing the environmental impact of collecting/storing data.

What next?

The traction behind the OECD’s “two pillars” is the biggest indicator yet of the appetite for reforming the taxation of the digital economy. We should expect the work to continue apace to implement the global minimum tax rate and ‘allocation of tax to market jurisdictions’ changes. New legislation is expected over the next 12 to 18 months.

This will not create a ‘data tax’ as such and there are huge challenges to overcome if one is to materialise. However, the same was said of the ambitious objectives behind the OECDs two previous large international tax work streams: first the “Base Erosion and Profit Shifting” (or BEPS) project and now the two pillar reforms. Many thought tax shifts of this magnitude could never be achieved in practice. So never say never and watch this space!