At the start of the month Google announced that, from November, it will be passing on digital service taxes to advertisers by adding a 2% fee for ads served on Google.

Naturally, the decision has been met with frustration from advertisers, who will now have to decide if they absorb the extra cost or pass it onto their customers. Not an easy decision to make in the current environment.

But is this simply a case of “tech giants” abusing their dominance or is there something else at play here?

Firstly, if any business is to receive a new and increased cost to itself, what would be the standard course of action? They’d naturally find a way of absorbing that cost or avoiding it, if possible. And therein exposes two problems with this tax. One in that it is essentially not fit for purpose, and two in that it does nothing to address the bigger issue of market dominance.

Essentially, one way the digital services tax is not fit for purpose is that it doesn’t acknowledge how tech companies like Google generate the majority of  revenue from auction-based advertising, where the costs are determined algorithmically by the amount of advertiser competition.

Other than this, perhaps Google would have to find a way of paying for the tax through business cost reductions. So, naturally Google have taken the easiest decision and arguably the best one – even for advertisers. Because, eventually, the market will adjust to it. Advertisers have a decision to make themselves when the tax arrives. They either take on the increased cost and accept a slightly lower ROI on their advertising, or they reduce the price they’re willing to pay for that advertising in the first place. In an auction, if enough advertisers choose the latter then everyone should see a reduction in media costs and therefore still achieve the volume of ad delivery they have been used to for their budget.

In the short term it’s more expensive, but in the long-term equilibrium returns and everyone ends up paying what they’re willing to in order to generate the ROI they want.

And Google are quite transparent about it:

“Digital service taxes increase the cost of digital advertising,” said a Google spokeswoman to the Guardian. “Typically, these kinds of cost increases are borne by customers and like other companies affected by this tax, we will be adding a fee to our invoices, from November. We will continue to pay all the taxes due in the UK, and to encourage governments globally to focus on international tax reform rather than implementing new, unilateral levies.”

Basically, don’t hate the player…

Perhaps this is insincere and Google know international tax reform is a pipe dream. Perhaps passing the Digital Service Tax directly to advertisers is more a statement than a necessity. Regardless, the impact to advertisers may be limited in due course once the auction prices adjust. So maybe it’s actually the best decision for everyone.

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