Google responds to South Africa’s tax threat

Global internet giant Google says South Africa’s Competition Commission’s threat to tax between 5% and 10% of its advertising revenue is a massive, irrational and unlawful overreach.

The commission this past week published a redacted version of Google’s response to the preliminary findings of the inquiry into South Africa’s media landscape.

The inquiry was launched in October 2023 to investigate the imbalance between digital platforms and their impact on news media in the country.

News platforms in South Africa have suffered significant losses over the last decade or so as the distribution of news content has become digital.

Users increasingly access information online through Google Search and platforms like YouTube, Facebook, X, and TikTok, while legacy media like newspapers have continued to decline.

The Competition Commission published its preliminary findings from the inquiry in February, where it concluded that digital platforms like Google and Facebook were raking in huge amounts of money at the expense of local media.

The commission found that while these boost traffic to online news sites, digital advertising revenue cannot compensate for the losses experienced by the shifting models.

This has resulted in shrinking newsrooms, a 50% reduction in journalism jobs, the “casualisation” of journalists, and the shutting down of community, vernacular, and regional news outlets.

Controversially, the commission said that these platforms had to find a way to compensate local media, either through channeling R300 million to R500 million in ‘lost revenue’ to publications over three years, or face a 5%-10% advertising revenue tax.

This is on top of a host of other changes it recommended, such as adjusting algorithms to give preference to local news in Google News searches and expanding revenue sharing.

Google hits back

While the commission’s findings addressed all major platforms, much of the remedial action was tilted towards Google.

The internet group took exception to this, noting that it was disproportionately burdened with the commission’s recommendations.

Its key argument against the findings is that the commission’s conclusions were irrational, reached using bad data and prejudiced positions, while not being in line with its jurisdiction or powers in law.

It said that the commission was assessing an industry in flux, and ultimately tried to pin the blame for the decline of South African news media on Google, whose conduct had nothing to do with it.

“The Provisional Report has incorrectly attributed the decline in the traditional news industry to platforms, particularly to Google, rather than identifying the actual factors which have contributed to this decline,” Google said.

Notably, it said the commission made material errors, assuming that news and media businesses in South Africa are entitled to a fixed level of consumer interest and revenue despite changing consumer habits and market conditions.

The commission also assumed that these businesses had a right to be compensated and benefited in isolation from the user and public interest in the content they produce.

“(The commission) seeks to divert the course of technological development to shield South African news publishers from change,” it said.

“Artificially directing Google Search users to visit news publisher websites by product changes, or making outsized and unwarranted payments to create forced subsidies for a select group of companies to temporarily prop up outdated business models, is not a sustainable approach.”

Instead, the group said South Africa’s focus should be on capacitating the news ecosystem to adapt to the fast-changing reality. It said it remains supportive of this approach.

Who needs who?

One of the more aggressive responses to the commission, however, was relating to the threat of a 5%-10% tax on advertising revenue.

Google said this tax would be “unlawful, unconstitutional, unfair, unreasonable, irrational and impractical”.

The group said that this turnover is primarily earned from non-news sources, so taxing this money would damage businesses that have no links to news at all.

This would be unlawful and impermissible, Google said, adding that it would likely violate South Africa’s international trade law obligations.

Regardless, Google said the Competition Act doesn’t empower the commission to “seek to impose remedial actions on firms and then threaten the introduction of manifestly unlawful, irrational, unfair and unreasonable sanctions if parties fail to comply.”

In a veiled threat, Google said that it has done additional research and found that removing news from Google Search completely would have a negligible impact on its bottom line.

It said that news-seeking queries in South Africa comprised 0.95% of searches in 2023, with ads placed on these queries leading to R18 million in revenue.

“Google has now also conducted a large-scale real-world experiment to calculate this value more precisely. This experiment found no detectable revenue impact from the removal of news content.”

“Given the statistical uncertainty in the experiment, that means that the maximum upper-bound value of news content to Google Search is 0.5% of Google’s advertising revenue, and most likely signicantly less,” it said.