Why we need a public enquiry into US tech giants

Nothing to see here folks.

Only a public inquiry – with the power to force delivery of evidence – will shed enough light on the operations of these omnipotent companies. Anything short of a public inquiry – not a behind-closed-doors Productivity Commission inquiry for example – would be a sham and a waste of time.

Only a public inquiry can act as a catalyst for serious change.

The power of the big two

Some simple facts illustrate the sheer power of US technology companies in the Australian media and information provision landscape.

In 2023, the two biggest American tech companies operating in Australia – Google and Facebook – generated almost $11 billion selling advertising to Australian businesses.

The revenues of the “big two” are now more than five times those of the combined print and online revenues of the news mastheads operated by Nine Entertainment (publisher of this article) and News Corporation (roughly $2.2 billion), the two companies that bear more than 90 per cent of the cost of original news generation in this country.

The gross Australian operating profits of the big two, which do not have an obligation to provide a curated news or public information service, are now more than 20 times those of the entire Australian media sector, whose core role is providing news and public information.

In making the comparisons above I am not criticising either Google or Facebook.

For what they are, and the services they provide, they are highly successful businesses that capitalise on their ability to accumulate and retain very large audiences. Few would doubt that both Google and Facebook provide services that have improved the overall quality of life and made it easier for advertisers to reach highly targeted audiences.

But there comes a time when too much power in a few hands is a bad thing, and that time is now.

For any inquiry into the growing power of the US tech titans to be meaningful it would need to look at ways of restoring a level playing field in taxation.

Using what the Europeans call “leprechaun economics”, Google, Facebook and a bevy of other American tech giants channel most of their Australian advertising revenues through the Republic of Ireland, where they can pay as little as 4.5 per cent tax on company profits.

I estimate that since the onset of the internet era Google and Facebook alone have shifted roughly $44 billion of Australian advertising revenues to Ireland and thereby reduced their Australian tax bills by (at the very least) around $9 billion.

Google and Facebook would argue that their Australian subsidiaries are merely acting as “resellers” of their advertising “operating companies” located in Ireland, and that the technology allowing these advertising sales to occur is resident in Dublin, not Sydney.

By this piece of accounting legerdemain, when a florist in Brisbane spends $500 to advertise on Google or Facebook, but only sells flowers to people in the surrounding suburbs, then according to the US tech companies about $400 of this advertising sale occurred in Dublin and the other $100 occurred in Brisbane.

Through this beautiful piece of flummery Google and Facebook reduce their effective tax rate on the profits from selling ads by Australians to Australians to around 6 per cent. Nice work if you can get it.

Lack of a homegrown tech industry

The loss of company tax revenues on such a scale is serious enough. But another serious problem with allowing US tech companies to pay little tax is that it contributes to undermining Australia’s ability to grow its own technology industries.

Australian advertising tech companies – among them REA Group, SEEK and CAR Group – don’t have the luxury of Leprechaun economics. On the profit they generate in Australia, 100 per cent of the revenue is kept onshore and they pay 30¢ in the dollar on profits.

Thus, on every $100 in profit the Australians ad-tech companies generate, they have $70 left over to re-invest in new technologies, new services and growing the business.

For the Americans, from every $100 of profit they make in Australia they have $94 left over. In round numbers, American tech companies operating in Australia start each day with a 34 per cent advantage over the locals in terms of financing growth and becoming ever more competitive.

Ten years ago Google and Facebook took less than 15 per cent of all Australian advertising revenues. Today the big two account for roughly 48 per cent of the advertising pie and that share grows by 3 per cent to 5 per cent a year.

This begs the question: what percentage of the $23 billion Australian advertising pie needs to be laundered through offshore tax havens for the Australian government to pull up the drawbridge?

What is abundantly clear is that unless the playing field is soon levelled – removing the heavy tilt in favour of US tech giants – Australia won’t have an advertising industry of its own by 2035.

In 2015, the then government passed the Multinational Anti-Avoidance Law (MAAL), an act aimed to limit the amount of tax revenues lost via big tech trickery. While MAAL has forced greater transparency it had little impact on actual tax collections. On my estimates, taxes “minimised” by the big two shunting Australian transactions through Ireland have been around $7.5 billion since MAAL was introduced.

There are any number of ways the government can level the playing field. Perhaps the simplest would be to impose a 15 per cent additional GST on advertising services provided through or by a foreign country.

The problem of funding

But levelling the online advertising playing field is relatively easy – at least in the mechanics of taxation – compared to solving the problem of funding Australia’s news media industry.

No democracy can function without a vigorous news media sector. The quality of a country’s governance is highly proportionate to the vigour and competitiveness of the news media. For all its faults and foibles, the news media is the last line of defence against bad governments, bad laws, bad policing and the scourge of corruption.

In common with most Western democracies the onset of the internet has led to the defunding of the news media in Australia. I estimate that the country’s principal news organisations have lost somewhere between $2 billion and $3 billion in advertising revenues since 2001. In round numbers the amount of money to fund journalism has halved.

I’ve racked my brain trying to come up with a news media funding model that could work, not represent a burden on the taxpayer, and would also be free from government interference.

About the only sustainable funding model I can come up with would be an independent news funding commission (INFC), managed and run completely independently of federal and state governments and where commissioners can only be appointed with the approval of a super majority (two thirds) of the House of Representatives.

By requiring a super-majority (which no single party has ever achieved) no single party would be able to rig the INFC board.

The INFC would fund registered news-gathering organisations on a blend of criteria including:

1. The number of full-time equivalent employees involved in news gathering and editing.
2. The number of full-time equivalent paid subscribers over the past 12 months.
3. A measure of total public engagement – such as total time on site, excluding bounce visits – over the past 12 months.

Funding would come from a tax on digital internet advertising, regardless of the nation where the transaction occurred, to raise around $500 million a year.

If the INFC was set up at the same time as the government closed the offshoring of internet advertising now taking place, the net result would be a boost of at least $2 billion a year to federal tax collections.

In a roundabout way this mechanism would force Google, Facebook and other accidental beneficiaries of news gathering organisations to contribute towards the product without having any power over the news media.

I’ll be the first to admit that my suggested new funding model would be controversial and find many opponents. However, it’s long past time that Australia faced up to the intertwined problems of tax shirking by global tech giants and our rapidly shrinking news media.

The problems are not going to go away and will only get worse.

Ivor Ries is a former Chanticleer columnist for the Australian Financial Review and stockbroking analyst.