translated from Spanish: the risks of digital platform tax

Geolocked Internet content for Mexico, leakage of service applications that seek less rigid markets, censorship of digital content, spying of users on the Network… These are some of the risks that civil society organizations warn may bring with it the Ministry of Finance’s initiative to tax applications like Uber, Netflix, or Amazon Prime.
On 9 September, during the presentation of next year’s Egraines Project, the Ministry of Finance asked Members to apply from April 2020 the special tax on Production and Services (IEPS) to digital platforms that are based abroad but offer their products and services in Mexico.
The idea, Treasury raised in its initiative, is to update the fiscal framework so that digital service providers abroad pay that tax and thus increase collection for public coffers and promote fairer competition with suppliers Mexican digital companies that do transfer the cost of VAT on their products and services to domestic consumers.
“There is no tax terrorism, we are not inventing anything new,” the Secretary of the Treasury, Arturo Herrera, who stated that this is not a new tax, but of changing the poor way in which it has been collected in Mexico for years.
To ensure the levying of the levy, the Treasury initiative warns that it will be able to take several measures, including a drastic one: the “suspension of the connection” of digital applications, services, and online content that does not meet the obligations Mexico demands.
The free speech organization, Article 19, and the Digital Rights Network (R3D), noted that while it is positive that the federal government is seeking measures to achieve greater tax collection for the country’s benefit, some of the Treasury’s proposals are “ambiguous,” “unconstitutional” and pose “risks” to freedom of expression and human rights.
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“Geolocked Content”
Luis Fernando García, executive director of R3D, raised in an interview that they identified five major risks.
One, that the Treasury initiative does not specify exactly what assumptions and categories of digital services will have to pay taxes and meet other obligations, such as registering in the Federal Taxpayer Register (RFC) with the SAT, having a representative on Mexican soil, pay VAT, and issue proof of payment electronically to customers.
This could lead to multiple foreign digital companies, especially small and medium-sized enterprises that, unlike ‘tech giants’ such as Facebook, Amazon or Netflix, do not consider Mexico as a priority market, to decide to restrict geographically its contents and services in the country so as not to have problems with the Mexican fisco.
“These small and medium-sized digital enterprises may find it more expensive to meet tax obligations than to stop offering their services in Mexico. And this does not benefit either the fisco, nor the Mexican users who will not be able to access those services and content, so it would limit the plurality and freedom of the Internet,” García said.
On this point, the Secretary of the Treasury, Arturo Herrera, acknowledged on 9 September that in the case of large digital platforms such as Google, Netflix, or Twitter, it will be “very difficult” to charge them taxes, because there is a controversy to international level about where they are causing the tax and how it has to be paid.
Censorship risk
The second point is that the Hacienda initiative envisages that when digital companies fail to comply with tax obligations they will be literally disconnected from the Mexican network until they are updated.
The R3D considered this proposal to be “unconstitutional” and “censor” the right of Mexicans to search, receive and share content and information on the Internet without any unlawful restriction. In addition, Luis Fernando García said that it would be an “impractical” measure from a technical point of view, since there are multiple applications on the Network that allow users to “sneer” content restrictions by changing the location of their IP address.
“That is one of the biggest risks posed by the Treasury initiative,” said Martha Tudón, Article 19 digital rights coordinator.
“Disconnecting digital platforms puts the nature of the free internet at risk and is disproportionate, because it would affect the right to freedom of expression and access to content,” he said.
For its part, the Latin American Internet Association, which includes Google, Amazon, Airbnb, Facebook, or Mercado Libre, also showed its “extreme concern” for this position.
“That the tax authorities threaten to disconnect internet services and platforms from users in Mexico (…) violates the open nature of the Internet, and the fundamental exercise of rights such as accessibility, freedom of expression and access to information, protected by the Mexican Constitution and the Inter-American Convention on Human Rights,” the Association, which “urged” the Mexican authority to review “the proportionality” of the sanction, to define an efficient and effective tax scheme.
In addition, the Latin American Internet Association regretted that the april 2020 deadline for multiple requirements and regulations to come into force is very short, which “will inhibit the ability of companies to serve them, especially SMEs, which do not they have legal areas or accounting firms, so it would be common for them to fail to comply with them having to face disproportionate penalties.”
Who gets user data?
Another risk: in order for VAT to be chargeable, the Treasury’s proposal is that foreign companies must demonstrate that the consumer of their products and services is in Mexico, depending on their home address, banking information, or IP address of the devices Electronic.
Luis Fernando García stated that the initiative, as drafted in the Official Gazette, does not clarify whether digital companies will have to collect this information from users and also give it to the Mexican government, so the door could be opened to ” potential privacy violations.”
“The initiative is very ambiguous at this point. It is unclear whether digital platforms will have to share that amount of user data with the Mexican state, which opens the door to possible illegal interference with citizens’ privacy,” Martha Tudón of Article 19 said.
Another risk, the R3D underlined, is that the Treasury’s initiative favours the collection of taxes not over the technological ‘giants’, but over the weaker links of the digital economy: the users, who will eventually absorb the increase in the costs of applications and digital services.
In addition, it would also affect drivers of private transportation apps like Uber, who will have to hold back drivers to ensure tax payments.
Instead, Luis Fernando García said, the initiative does not raise taxes on the sale of advertising and other profits from the exploitation of personal data, which are two of the ways in which technology giants obtain million-dollar resources.
“We find it demagogic that it was thought that this initiative is to pay more the ones that have the most money. What we are considering is that we want to move the tax to end users, while taxes on large companies for their profits generated in Mexico are very low, or they are left in limbo,” Garcia insisted.
Faced with these risks, both Article 19 and R3D raised the need for a dialogue with the Mexican Government, including civil society organizations, “with the intention of strengthening and modifying the design of collection mechanisms related to the digital economy, so that they are effective, proportionate, without transgressing the Constitition or having negative impacts on the exercise of human rights.”
 
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Original source in Spanish