Social media firms are under fire globally

 

Social media firms are under fire globally, and Pakistan is no exception to that trend. Another version of rules to govern these firms has come to town. And it remains to be seen if it will stick around. The previous three versions, released over the past roughly two years, had courted controversy. While civil society had raised questions on legalese impacting freedom of speech, social media companies have raised alarm over provisions concerning liability, data localization, and local market incorporation.

Recall that earlier in March this year, the premier had constituted a high-level committee to swiftly resolve the impasse after consulting all stakeholders. Now, after many months of delay, finally the new social media – “Removal and Blocking of Unlawful Online Content (Procedure, Oversight and Safeguards) Rules, 2021” – have been reportedly notified. So, what is new in the latest version?

Notable among the major changes is the clear enunciation of how existing laws will be invoked in case there is content created or spread over social media platforms that falls foul of those laws. Another significant change is that the social media companies are no longer required to set up their offices in Pakistan within a set timeframe. The tech majors can establish a local office “as and when feasible”. However, social media companies are required to register with PTA within three months.

Similarly, the new rules have omitted previous requirement to establish database servers in Pakistan. In short, two among several contentious clauses in the eyes of social media firms – those pertaining to local incorporation and data localization – have been done away with. Will this placate the likes of Facebook, Twitter, and Google that has been protesting the social media rules under the banner of Asia Internet Coalition? The tech majors had, at one point, even warned they would stop servicing users in Pakistan if their concerns were not addressed.

While foreign investment and tech transfer are much-needed, it was never a good idea to use regulatory directives to force tech companies to have local presence. It sent a wrong message to foreign investors in other sectors, too. Now it is good to see coercive language removed. Social media firms can now choose to invest in local office(s) if they think it makes business sense. (Under the rules, they must appoint compliance and grievance officers within Pakistan anyway).

There are other, market-based mechanisms to attract foreign tech investment. For instance, there is a whole menu of fiscal incentives and investor facilitation framework being promised by the recently-established Special Technology Zones Authority (STZA). It is too early to tell if the STZA will take off as per its management expectations – its success will depend on attracting some of the big tech and social media firms, especially in areas of outsourcing, data centres, innovation labs, etc.

There is also this issue that technology firms pay little to no tax in developing country markets where they do not have physical presence but continue to generate considerable user-base and data. The taxation argument to force local incorporation may also grow weak with time, for it may soon become possible to tax social media firms without them having local presence. Last week, an OECD-led framework (endorsed by 136 countries and jurisdictions) spelled out rules to proportionally re-allocate global corporate income tax of major tech companies to countries based on business activities.

Tellingly, Pakistan (along with three other countries) did not endorse the OECD deal, which also forged a consensus on having a minimum corporate income tax rate of 15 percent.

Global momentum is behind taxing tech giants. In this environment, Pakistan needs to ensure that a conducive environment is provided to tech companies to set up shop here. Whether the amended social media rules are helpful in that regard remains to be seen.

For a better part of last decade, leading Western scholars have been trying to understand the root-cause behind the right-wing populism that enabled, among other seismic events, Brexit and the Trump presidency. They all seem to agree on one thing: corporate shopping for tax-light jurisdictions, as well as shifting of manufacturing jobs overseas, has limited governments’ capability to create more jobs and undertake infrastructure and social spending, thereby fueling public anger and resentment.

The global political elite has been complicit in failing to stem the tide of corporate greed, and this is especially true when it comes to the US government protecting interests of its large industrial, tech and hydrocarbon firms. But with growing backlash on both the right and the left of political spectrum, it appears that corporate wealth may soon find it difficult to maintain its coveted parking spots.

Last week, after years of high-level negotiations, OECD member countries, along with G20 nations and dozens of developing countries, agreed to a framework that they hope will rein in corporate tax arbitrage and place tech companies firmly under the ambit of global taxation. The new rules, which have been endorsed by 136 countries and jurisdictions, will come in force from 2023. While China and India signed on, Pakistan, Kenya, Nigeria and Sri Lanka have not endorsed the deal yet.

As per the OECD, the global corporations’ practices of tax avoidance and shifting of profits overseas cost the world up to $240 billion per annum, which corresponds to 10 percent of global corporate income tax receipts. Often, it is the developing countries that have to suffer, as large tech companies do business in those markets without a physical presence there or having to pay taxes there.

To bring fairness, the first major change concerns how global corporate income taxes will be re-allocated across the world in the future. If Company X, for instance, is headquartered in Country A but it also has business activities and makes profits in Countries B, C and D, the new OECD rules would allow for some of the Company X’s income tax collected in Country A to be re-allocated proportionally to Countries B, C and D.

This change will apply to all multinational entities that have global revenues in excess of 20 billion euros and profit margin of at least 10 percent. OECD expects this measure to re-allocate $125 billions of profits from some 100 global corporations to countries across the globe, where those companies have operations.

The second major change under this agreement is to impose a minimum corporate income tax rate of 15 percent across the world. The idea is that countries should compete more over business conditions than taxes. This rule will apply to global firms with sales of at least 750 million euros. OECD expects this measure to generate $150 billion in additional corporate income tax per annum.

While the Biden administration has lately received plenty of flak from its allies over the botched Afghanistan withdrawal, it has been working behind-the-scenes on tangible stuff, too. This global tax deal is arguably the clearest sign yet that the US is now back at the table. And this is an issue that can potentially have lasting imprint on governments’ ability to raise living standards. Countries like Pakistan, which have low fiscal space but yearn to attract foreign investment, can benefit, too.