Australia could tax Google, Facebook and other tech giants with a digital services tax – but don’t hold your breath

Tech giants like Google, Facebook and Netflix make billions of dollars from Australian users every year. But most of those profits are not taxed here.

To address this tax gap, some countries have introduced a new kind of tax called the digital services tax, or DST. It applies to revenue earned from users in a country, even if the company has no physical operations there. Some European Union member countries, the UK and Canada have all introduced such a tax.

In Australia, it is estimated the five largest tech giants recorded A$15 billion in revenue in Australia last year, but combined they paid only $254 million^[1] in tax.

Australia has never contemplated imposing a similar tax. New Zealand tried but backed down^[2] last week after the United States threatened to impose higher tariffs on New Zealand goods.

So what’s holding Australia back?

How 20th-century tax treaties create 21st-century problems

To understand why Australia thinks its hands are tied^[3] on the taxation of the multinational tech giants, we need to step back in time.

About 100 years ago, Australia and other developed nations decided to tax residents on all their income earned worldwide, while non-residents were taxed only on income earned locally^[4].

After the second world war, Australia entered into tax treaties^[5] so foreign companies selling to Australian customers would no longer be taxed here. Instead, those companies’ home countries would tax all their profits.

As the world moved to digital products this century, it became easy for giant multinational enterprises offering advertising on social media (such as Facebook and Instagram), advertising on search platforms (Google), and streaming services (Netflix) to provide those services from abroad. Little or no activity is conducted through local branches.

But countries where the sales are made have increasingly questioned the wisdom of having forfeited their taxing rights over income by foreign providers.

The rise of the digital services tax

The obvious solution would have been to renegotiate the treaties. This would restore the right of countries like Australia to tax foreign companies’ profits made from local customers or users.

However, treaty renegotiation is slow and complex. So several European countries, beginning with France^[6] in 2019, came up with a short-cut solution.

They introduced a discrete new tax on sales of digital services, called digital services taxes (DSTs). While the specific design varies by country, most DSTs apply a low tax rate, typically between 3% and 5%, on revenue rather than profits. They target large digital platforms that earn money from users within the taxing country, regardless of the company’s location.

Because DSTs are levied on revenue and are structured as separate from income tax, governments argued they could be introduced without breaching income tax treaties.

The new taxes quickly became popular and spread widely^[7]. In Australia, the Greens have called for a DST, but both major parties have remained steadfast in their objection^[8] to a new tax. This is due to the concern that the US may impose retaliatory tariffs on Australian goods.