The Digital Services Tax as a Tax on Location-Specific Rent

31 Pages Posted: 7 Feb 2019 Last revised: 11 Apr 2019

See all articles by Wei Cui

Wei Cui

University of British Columbia (UBC), Faculty of Law

Nigar Hashimzade

Durham University - Department of Economics and Finance

Date Written: January 23, 2019

Abstract

In 2018, the European Council and the UK and Spanish governments each proposed to introduce a Digital Services Tax (DST), to be levied on the revenue of large digital platform companies earned from advertising, online intermediation, and/or the transmission of data. We offer a rationalization of the DST as a tax on location-specific rent (LSR). That is, just as many countries already levy royalties on rent earned from extracting natural resources, one can think of the DST as a tax levied on economic rents earned by digital platform companies from particular locations. We provide stylized examples showing how rent earned by digital platforms can be traced to specific locations, even when users from multiple jurisdictions participate. We then elaborate the analogy between the DST and resource royalties, and analyze the DST’s economic incidence as well as its effect on consumer welfare using a simple model. Finally we explain why the DST’s significance goes beyond current concerns about multinational tax avoidance, in that it indicates directions for redesigning international taxation in the age of labor-replacing AI technology.

Keywords: digital services tax, international taxation, location-specific rent, digital platforms

JEL Classification: H21, H25, K34, M37, M48

Suggested Citation

Cui, Wei and Hashimzade, Nigar, The Digital Services Tax as a Tax on Location-Specific Rent (January 23, 2019). Available at SSRN: https://ssrn.com/abstract=3321393 or http://dx.doi.org/10.2139/ssrn.3321393

Wei Cui (Contact Author)

University of British Columbia (UBC), Faculty of Law ( email )

1822 East Mall
Vancouver, British Columbia V6T1Z1
Canada
6048274765 (Phone)

Nigar Hashimzade

Durham University - Department of Economics and Finance ( email )

Durham, DH1 3HY
United Kingdom

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