Regulating Big Tech, the Too-Big-To-Fail Way
There has been much talk about breaking up Big Tech, but not sufficiently at the international level — including at the OECD. The post-2008 financial reform agenda can be a source of inspiration as we move ahead.
Top-heavy market concentration in the digital economy is well documented. It is evidenced by the OECD’s 2019 Going Digital report. The risks that go with it are also well known. The ITUC, the sister organisation of the TUAC at the international level, for example published a report in July with the New Economics Foundation exposing the dangers of the current e-commerce discussions at the WTO. In the current state, the Big Tech have the upper hand.
Data is the new gold, the value of which is difficult to measure and the “GAFAs” are taking full advantage of that. Excessively powerful, economically and politically, they are capturing an enormous amount of wealth, but also enormous market power, with consequences for consumers and workers when this translates into data control and labour market monopsony — the latter being raised in the OECD Employment Outlook 2019 .
And in fact, their CEOs agree. In July, Bezos, Zuckerberg, Cook and Pichai told the US Congress that they have “too much power”.
TBTF 2008 versus GAFA 2020
The spotlight is on the digital economy. Ten years ago, the banking sector was in a similar situation. Banks were considered “too-big-to-fail” (TBTF) and also too-big-to-be-regulated, to be supervised, etc.
In the aftermath of the 2008 financial crisis, the G20 mandated the Financial Stability Board (FSB) “to address the systemic risks and the associated moral hazard problem for institutions that are seen by markets as TBTF”. Since then, an official list of banks deemed TBTF is updated annually by the FSB. In June 2020, the FSB released a consultation report on assessing the impact of TBTF reforms. The report finds that the TBTF problem is not entirely resolved and that significant gaps remain. But the regulatory approach that was then adopted, and the international cooperation framework that went with it, were the right ones: devising specific rules, specific regulation and specific mechanisms to TBTF institutions, including:
- additional requirements coming on top of the general prudential rules Basel III (aka “total loss-absorbing capacity (TLAC) requirements”)
- additional supervision (including international colleges of national supervisory authorities);
- additional authority for supervisors should things go wrong (aka “effective resolution regimes”).
The tax negotiations
The policy discussions on the digital economy at large, and on Big Tech in particular, cover a wide spectrum from data privacy, to competition, tax, and cybersecurity. They are under way at national level and at European level. At the international level however, and pending the launch of negotiations at the WTO on e-commerce and aside from data privacy and protection, discussions on tax aspects are the most visible and most advanced. And for a reason: GAFAs are under-taxed.
At the end of 2015, the G20 tasked the OECD to set up an “Inclusive Framework” to implement the Base Erosion and Profit Shifting corporate tax reform package agreed then, but also pursue further reform on tax and digitalisation. Over 130 countries have joined the Framework since then.
Today, the negotiations are organised around two complementary pillars to “address the tax challenges arising from the digitalisation of the economy”. These are comparable to the post-2008 FSB process on banking regulation and TBTF. Akin to the revision of the Basel prudential regulation for banks, “pillar 1” aims to revise the international standards for corporate income taxation of MNEs. The current proposal would introduce a light dose of unitary taxation (by opposition to the failed “arm’s length principle” on intra-MNE transfer pricing). A modest, but right move towards taxing MNEs for what they are: single entities, not an aggregate of entities created by tax lawyers. And again, similar to the TBTF “resolution frameworks” (i.e. when things go wrong), “Pillar 2” aims at securing a right for governments to redress under-taxation of entities benefiting from opaque overseas schemes.
Negotiations are supposed to end this year; they have been slow and difficult. On the surface, much is to blame on the current US administration, which abruptly pulled out of the negotiations before the summer break. Yet, the root causes seem to lie deep in national interests and trade considerations. It is difficult to judge given the confidential nature of the discussions, but the short-term desire to protect the interests of each countries’ “own” MNEs (fully digitalised, or not) seems to dominate over the broader matter that is at stake: the global under-taxation of digital activities.
Wrapped up in technicalities
If the tax negotiations are not advancing enough, it is also because of the complexity of the topics on the table. Just like banking resolution and prudential rules in 2008, it is those who precisely contributed to the complexity of rules for the purpose of regulatory arbitrage (the bankers, the tax lawyers), who have a comparative advantage in the negotiations. They know better because they set the rules.
The overly strict adherence to business confidentiality rules is not helping to clarify the discussion. We end up with a catch-22: business groups and many governments fiercely opposed to corporate transparency and public reporting on tax revenues in 2015, come to find out in 2020 that they are struggling to have a clear picture of the tax impact of the digital economy — clarity missing precisely because of the failure to agree on public data and public reporting in 2015.
Just like banking and financial regulation, tax simplicity and transparency matter in their own right, but also for the purposes of reform and negotiations. When the system combines with self-reporting and self-risk assessment, both financial regulators and tax collectors will always be played by their counterparts — the bankers, the tax lawyers, and the “creative” accountants. Now, they are played by the Big Tech.
Back in 2013, Adrian Blundell-Wignall, who was then deputy director of the OECD Directorate for Financial and Enterprise Affairs (DAF) and colleagues of the OECD Secretariat delivered a cold assessment of the banking regulation reforms precisely on the grounds of complexity and self-serving reporting:
“First [Basel III] is too complex, allowing large banks plenty of room to manipulate it both with their models and derivatives thereby avoiding effective control on leverage. […] Second, […] Basel III has not dealt with bank business model issues that are at the heart of TBTF [problems]”. [p6] “This complexity has made it even more difficult to bring capital rules into alignment for all financial institutions — it has not achieved the regulatory principle that the financial promises should be treated in the same way no matter where they are shifted”. [p17]
From there, the OECD Secretariat recommended “a simple adequate leverage ratio”, one that would be “controlled directly” by regulators. We could use that same text, replace “Basel III” with “current tax rules”, “bank” and “financial institution” with “digital economy” and “TBTF” with “Big tech” and we would then have a very similar picture. But that has not been recognised as far as the OECD tax work on the digital economy is concerned.
The business model revolution
Both the Big Tech and TBTF debates originate from “revolutionary” business models that are disrupting the way regulators see the world. Post-crisis, financial regulators were struggling to understand how the business models of banks had shifted so rapidly in the years prior. Policymakers thought about “boring banking” — i.e. institutions that were making a small profit margin between loans and deposits, with a low-risk exposure. The reality for TBTF groups was very different. Profits were not “boring” at all, originating in the speculative trading and the selling of opaque products to the markets, products where, they themselves had no skin in the game. It is the realisation of the changing nature of the business models of large banks, making them TBTF, that prompted the need for specific regulation and specific supervision at the international level.
The breaking nature of the business model is even more pronounced in the case of the digital sector, but the OECD so far is drawing different conclusions to their financial and banking peers. Both the OECD flagship report Going Digital in 2019, and the more specific tax-related report on the digital economy in March 2018 recognise “key features” of the digital business model:
- the capacity to “scale without mass” (Going Digital report) by generating profits and market power via the accumulation of data (“no mass”), cloud and online platforms resulting network and lock-in effects and the challenges to identify the “nexus” (Tax report) when physical presence is no longer needed to carry out business;
- The value of intangible assets — not the traditional ones, like licensing and IP rights, but the newer ones: the processing and exploitation of data, “free” user contributions and branding effect — is particularly challenging to measure (for the purpose of fixing tax liability, of value collaterals to fund raising, etc.);
The Going Digital report elaborates on a number of other “vectors of digital change” while the tax experts add another key feature related to the difficult “characterisation” of digital transactions. But all in all, the OECD recognises the revolutionary nature of digitalised business models, in much the same way the OECD and financial regulators did post-2008 when dealing with banks deemed TBTF. However, here comes a twist. Both the Going Digital report and the tax report stay away from drawing conclusions on specific rules and specific supervision. The OECD report on the BEPS and digital economy of 2015 is clear about that where it states that, while business models are specific, they cannot be “ring-fenced”:
“Because the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes”.
No ring fencing, no identified group of high-digitalised businesses, no specific regulation or supervision applying to systemically important big tech groups. If regulation has to be tightening on taxation, it cannot aim specifically at the GAFAs, because we are all destined to become digital companies and that is, in essence, what the OECD is saying. The no-ring-fencing principle has been guiding the entire OECD work on tax and digitalisation since then. Early 2018, the UK presented a tax reform proposal to the OECD that precisely would target fully digitalised businesses — it was rejected on the ground of the non-ring fencing principle. The principle is being contested by many governments, as seen in the recent rise of national determined “digital service taxes” — which in turn are disrupting the OECD negotiations.
The failure to address corporate concentration
Tackling the excessive market power of the GAFAs through competition rules is a lively topic in many parliaments and national executives. The market power of the Big Tech is such that it might be illusory to rely on existing competition frameworks to deal with the issue. And unlike tax and financial regulation, there is no international forum on competition that has the power and the authority to set international norms. For its part, to date the OECD position relies on the very same established competition principles that prevailed over the past 2–3 decades. In its report on the Regulatory effectiveness in the era of digitalisation of June 2019, the OECD recommends to facilitate entry of new players who would gradually contest the dominant role of the GAFAs. More competitors should solve the problem, we are told. The policy framework underpinning that view is the OECD’s Competition Assessment Toolkit revised in 2019. This toolkit is drawing on an old report of the OECD “Regulatory Reform” dating back to 1997 and one that considers regulation as second priority to trade, competition and market liberalisation.
There are however a growing number of alternative views outside the OECD that call for reviving the discussion on anti-trust policies and other specific regulatory measures aiming at the Big Tech. Sebastien Soriano, chairman of the French telecom supervisory authority, ARCEP, for example, calls for antitrust rules for Big Tech in what he calls the need for Empowering the Many by Regulating a Few . In a report released in September 2019, he and other digital experts offer innovative views on dealing with Big Tech — by OECD standards at least. In January 2020, Soriano further proposed “four golden rules” regarding regulation of the “digital ecosystem”:
- “focus on structuring platforms through asymmetrical regulation. Forget classical horizontal rules.
- give the power back to the people (not the State): consumers, entrepreneurs, NGOs, academics. […] with ex ante rules to give more choice to the users and by regulating with data.
- rely on a specialised authority, ensuring a permanent monitoring of the regulated parties. An authority with a “stick”.
- Ensure a good articulation between the national level and the European level. Both levels are relevant.”
Soriano’s “asymmetrical regulation” would require the formal listing of dominant players in the digital markets — a practice existing already not only in the telecom sector but also in the banking sector, with the annually updated list of TBTF groups maintained by the FSB.
“SIDIs”, systemically important digital institutions
In the post-crisis world of 2008, international cooperation was fit for purpose to deal with the banks that were TBTF. On substance, much remains to be done and is far from perfect ten year after. However, something happened at the international level with multilateral cooperation delivering tailored policies and instruments to deal with the TBTF banks. It had an authoritative forum for that, the FSB.
There is no equivalent to the FSB when it comes to policy debates around the GAFAs internationally. Hopefully the on-going tax negotiations will deliver good outcomes, but they will very likely not aim specifically at fully-digitalised businesses.
The former CEOs of big banks who were given a hard time in the many parliamentary hearings in the aftermath of 2008 might observe the current debate with irony. Their heirs, the CEOs of the GAFAs are also being grilled in parliamentary hearings. For now however, they do not face the same international regulatory consequences.
Could the OECD fill in that role? And would that be desirable anyway? What plays in favour of the OECD is for sure its multi-disciplinary nature; this formidable capacity to address a given topic from different angles. But the bottom line is for the OECD to level-up its policy stance on the excessive market concentration in the digital economy, including by engaging in a blunt discussion on anti-trust measures, and on transparency over data.
A first step could be the creation of an official list. National regulators do that all the time. Internationally, the FSB maintains an official list of TBTF banks, also known as the “SIFIs”, for systemically important financial institutions. The G20 and the OECD could work toward a formal list of “SIDIs”, systemically important digital institutions.
