This Is the Best Way to Tax Google and Facebook

(Bloomberg Opinion) -- It's only a matter of time before European countries start taxing tech multinationals, first individually and then in a coordinated way. The question really is how digital taxes will work, and so far, the Czech Republic appears to have the best idea.

It became clear in March that France's push for a Europe-wide tax on Big Tech's local revenues would fail for now. Germany torpedoed it because of fears of U.S. retaliation against European multinationals, especially German carmakers, and the European Union now is waiting for the Organization for Economic Cooperation and Development to come up with a global plan. The OECD's most recent document on the issue reflects an intense deliberative process that could go on for quite a while. In the meantime, individual European countries are trying out different approaches.

France's idea is to claim 3 percent of revenue generated locally by large companies running digital intermediary platforms (like Uber or Airbnb) or online advertising businesses. Austria's is similar, only with a 5 percent rate. Slovakia is trying to collect traditional corporate tax from foreign tech firms by redefining corporate presence for the digital era. The U.K. wants 2 percent of local revenue from companies whose business model requires the active participation of U.K. users in creating content, being targeted with advertising or linked by intermediary platforms.

The Czech finance ministry plans to have a digital tax proposal ready by the end of this month. What's known about it so far is different from other nations' plans in two important ways: the high proposed tax rate of 7 percent, and the targeting of advertising and personal data sales as the primary base. The country also plans to tax sharing economy platforms. It estimates receipts of about 5 billion korunas ($217 million) a year. France, with six times the Czech Republic's population, only hopes to receive about 2.6 times as much.

At first glance, the idea behind the Czech digital tax is similar to the French one, but the French proposal names platforms that put users in touch with each other for a fee as the primary target, while the Czech one prioritizes targeted ads. That puts the emphasis in the right place.

The basic unfairness of global giants hardly paying any tax in most of their countries of operation isn't the only reason for countries to levy a digital tax; then, India's solution – a tax on anything Indians pay online to a non-resident company – would be sufficient. An important question to ask is what exactly about tech companies activities' requires monetary compensation to society.

Intermediary platforms such as Airbnb and Uber exacerbate cities' housing problems and weaken worker protections. But these negatives can also be handled through regulation rather than taxation: Professional Airbnb hosts can be forced to obtain hotel licenses, while Uber drivers can be granted paid leave and minimum wages. Compensation is largely due for the use – many would say abuse – of personal data for advertising purposes.

Europe has tried to set some data use rules with the General Data Protection Regulation, which came into effect last year, but it doesn't put a monetary value on private data or allow users to recover any of the money that targeted advertising companies make on them. The companies themselves operate on the assumption that the “free” services they provide offsets the value of the data collected, but that's not necessarily true: Research shows, for example, that quitting Facebook makes people happier.

There's also plenty of evidence that ad targeting is a potent political manipulation tool: It has helped malicious actors during the 2016 U.S. presidential election and the Brexit referendum, arguably helping to subvert democratic institutions. Besides, targeted ad platforms have deprived news organizations of previously reliable revenue streams, creating yet another negative externality for democracy.

The potential disparity between the value of personal data and what users receive in return creates space for governments to seek reimbursement on society's behalf. The Czech Republic is a low-tax country – it has a flat 15 percent personal income tax – but it is setting a relatively high rate for data use. The often-heard argument that the tax simply will be passed on to advertisers may not be valid with a 7 percent rate: If Facebook and Google merely add it to their bill, advertisers may well think of going elsewhere, including to news sites and traditional advertising media.

Governments shouldn't be shy to ask for more: At some point, this should produce reliable estimates of the true worth of our personal data. For example, the Czech Republic has 9.3 million internet users. The finance ministry's revenue projection puts the value of their personal data not covered by the “free” services provided at about $23 a year per user – still a modest amount. Trying to raise it could help find an equilibrium at which the digital advertising problems can still be profitable without strangling the competition that doesn't try to target ads on the basis of personal data.

Taxing advertising that is based on personal data could make another important contribution to the common good. If the idea is to tax the revenue from clicks on and views of ads shown in a specific country, then platforms such as Facebook and Google must be required to disclose to a government analytical data on where the clicks and impressions occur. Governments would, naturally, want to audit the data. That would be a major step toward much-needed transparency: There's too little independent control of digital advertising companies' claims of precise targeting and advertising efficiency. Whatever information governments collect from platforms for tax audit purposes should be available to advertisers and the public, too.

One can only hope the legislative process doesn't defang the Czech government's digital tax initiative or dilute its focus on targeted ads. The Czech Republic is a small country, but it can set an example for bigger neighbors and even the U.S.

To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.