02 Apr 2018

Why tech and social media companies should face stricter regulation and pay more tax

Yair Cohen, a partner at Cohen Davis Solicitors, discusses the pros and cons of self-regulation and considers why the current taxation system is unfair.

Internet policeTo understand the reasons behind the need to end the special treatment tech and social media companies receive by the UK and other Western governments, both, in terms of general regulations and taxation, one must first understand why the old system of entire self-regulation, which has been in place since the inception of the internet has failed.

Why self-regulation of the internet has failed

From the early days of the internet, tech companies had been regulated by a so-called private governance system which allowed them to create policies, police content if they wished to and to impose sanctions on whoever failed to play by their rules, whether users, content creators or advertisers.

To encourage internet companies to proactively self-govern their platforms responsibly and without fear of legal liability, in the US, Congress enacted section 230 of the Communications Decency Act 1996 which, among other things, allowed internet platforms to operate as the new governors of online speech. These new governors operate as private self-regulating autonomies within cyber space, but unlike a typical western democracy, their governance could be seen by some as totalitarian in nature, as the executive, legislative and judicial function of each organisation is entrusted to a small group of employees who are responsible for the entire governance framework at each organisation.

These employees are not accountable to their ‘citizens’ (their users) because the nature of much of their self-regulatory work is still opaque and often kept secret by the tech company.  Traditionally, tech companies viewed any form of regulation of the internet as damaging to free speech and, as a result, many failed to appropriately invest in policy creation or in the protection of their ‘citizens’ from harm.

In its early years, for example, Twitter’s policy was to have no content moderation because it did not wish to place itself in a position where it was required to sensor users’ activities on its platform.

As the number of internet users has grown, so has the harm to which they have been exposed. The harm rapidly started to spill over to the offline or real world, which meant dealing with the causes and consequences of the harm has become the responsibility of the traditional branches of the state.  This in turn has caused governments to start questioning whether the private governance system was still an appropriate way to regulate the internet.

In its early days, the internet was driven mainly by academics and not-for-profit organisations but now when it is nearly entirely dominated by self interested shareholders, the potential for conflict of interests between tech companies’ duties to their shareholders and their duty to fairly govern their platform has started to become a real concern to governments.  This is reflected in demands by internet users for governments to reconsider the traditional approach towards internet regulation. Governments are particularly listening to three main areas of concern:

•  users’ safety (online and offline)

•  data manipulation (‘fake news’), and

•  taxation (fairer share of benefits)

ieaIn January this year, the Institute of Economic Affairs, (IEA) has produced a report, addressing the likelihood of government regulation of the internet due to the three main areas of concern. The report suggests that the way to treat the three areas of concern is to prescribe more of the same, namely more self- regualtion and less taxation. It is difficult to see how prescribing more of the very same medicine that has caused the ilnesse in the first place is going to improve matters for the citizes of this country but the IEA thinks that goverments should stay of it altogether.

Users’ safety

The IEA report, suggests that tech companies should set up an independent regulator to avoid government interventions. The report takes example from the self-regulatory system of the UK newspaper industry to show that such a self-regulatory system of the internet can work. The report says that in the UK newspaper industry, self-regulation has been effective because in a competitive market, reputation and peer pressure are important. These two factors help self-regulate the printed press industry as readers can ‘vote with their feet’.

The problem with this correlation is that, unlike the case with the printed press, the internet tends to create niche activities, particularly bad ones and those with a poor reputation for decency or credibility, many of which result in internet users feeling less safe. For example, it was not until governments across the globe created a hard, international regulatory framework that child pornography was properly tackled. It is doubtful whether a self-regulatory system would have ever been able to achieve a similar outcome.

Furthermore, with printed press, consumers can easily opt-out or ‘vote with their feet’ if they don’t like the conduct of a particular publisher, but with the internet this often is not possible. Try, for example, to refrain from using Google search engine or try to convince your children to refrain from using WhatsApp or YouTube. You are likely to find that because of either the popularity of those platforms, or the fact that they are provided for free, the choice to ‘vote with your feet’ is not a realistic choice.

Data manipulation and fake news

The IEA report insists that allowing the state, rather than internet companies to determine what is and is not ‘fake news’ could be a more damaging prospect that the fake news themselves. When the report refers to ‘fake news’, it claims that the issue is ‘overstated’. It suggests that a system of self-regulation will be more suited to tackle the problem because ‘allowing the state to decide what is or isn’t “fake news” could be a far more dangerous threat to democracy’. It further claims that the market is responding well to the issue by creating appropriate filters or by users simply staying away from websites that they consider to be unreliable.

Although arguing against government regulation is not without merits, there has been a sharp increase in investment by internet companies such as Facebook and Google in users’ safety and content moderation since they had been subject to regulatory threats during the course of the past two years (both companies have nearly doubled the number of employees carrying out those duties). Increased regulation by still a relatively small group of unaccountable individuals, who might be sitting anywhere in the world is equally unattractive. Arguably, a local, transparent body appointed by government is likely to be more accountable.

Ideally, the question of who should decide what news internet users should be exposed to should be resolved by a transparent system with clear guidance checks and boundaries. As owners of tech companies are largely representative of small sections of society, while governments represent the entire population of a state, the question of who should be carrying out censorship (if at all) requires a much more thorough debate.

Taxation

The IEA report also makes the case that it is a bad idea to demand tech companies to pay a fairer share of tax. Its main argument against making tech companies to pay more tax is that this could damage innovation.
But would increased taxation really deter investment and innovation in the sector?

There are calls by internet users for government to regulate the internet, not only in terms of content but also with regard to redistribution of profits. Taxation is the capitalisticsystem’s method of wealth redistribution. More government intervention and regulation of the internet would require higher budgets and while internet users are the highest contributors to the success of tech companies, they have seen very little investment being put back by those companies into customer services, safety and security.

In many cases, their primary duty to shareholders has meant that some tech companies have been perceived to be finding ways to avoid paying local taxes in proportion to the profits they make. The IEA strongly rejects calls for tech companies to pay more taxes. Its view is that instead of higher taxation, tech companies should be more transparent and perhaps open themselves to higher levels of financial scrutiny.

The IEA argument against higher taxation is surprisingly frail.

First, it says that tech companies should not be required to pay more taxes because the payment of lower taxes ‘reflects the underlying economics of their business models’. While this might be true, since tech companies have been so successful because of their ability to easily adapt to different countries, cultures and economic climates, it will arguably not be too difficult for the majority of them to adapt to a higher, less one-sided, taxation environment.

Second, the IEA warns that higher taxes, for example, on advertising revenue, could be discriminatory and might hurt start-ups. Again, while this might end up being the case, what has made tech companies so strong is their ability to adapt and although this type of taxation might hurt profits, it could come with sufficient exemptions to ensure that start-ups are not hurt.

Third, the IEA warns that taxation would deter investment in new technology. This argument however can easily be turned on its head as higher taxation is also likely to result in greater investment in efficiencies, which means the continual development of newer, better and faster ways of doing things. Furthermore, to reduce taxation, tech companies might decide to invest more of their profits in new technology or in better customer services, perhaps at the expense of their shareholders.

Fourth, the IEA warns of higher prices to consumers should taxation of tech companies increase. This is unlikely to happen as many of the services are provided to the consumer free of charge, but even if there was a cost to the users, provided any additional taxation revenue is invested by the government in creating a safer and a more secure online environment, losses to online users might be balanced in this way.

Yair Cohen specialises in UK and international internet law. He is author of The Net Is Closing-birth of the e-police.

An earlier version of this article was first published on Lexis®PSL TMT on 16 March 2018. Interviewed by Kate Beaumont.

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