Earlier this month, the federal government passed laws to encourage tech giants to pay Australian news businesses for journalism. This is known as the News Bargaining Incentive .
Author
- Fei Gao
Lecturer in Taxation, Discipline of Accounting, Governance & Regulation, The University of Sydney, University of Sydney
For companies earning A$250 million or more in annual Australian digital advertising revenue (likely to include Meta, Google and TikTok), the scheme imposes a 2.75% charge on this revenue . That’s unless they have entered into commercial agreements with Australian media, to fund them directly.
I’ve previously argued in The Conversation the proposed scheme looked remarkably like a ” digital services tax ” – precisely the kind of tax United States President Donald Trump has threatened to retaliate against.
I ended with a question: would Trump notice? We now have an answer.
In April, the Trump administration characterised Australia’s approach as ” foreign extortion “. Even though the new laws do not explicitly single out any country, US technology companies and industry groups have also attacked the measure as discriminatory .
With some US Republicans recently calling for retaliation against ” loser country ” Australia, do their criticisms of this tax have any merit? And what could happen now these measures are law?
Tax rules designed for a different world
To understand the US reaction, we need to go back to a basic rule of international taxation that is about a century old – the notion of “separate accounting”.
The idea is countries tax companies based on where they carry out the activities that generate their profits. Such activities could include developing technology, designing and manufacturing products, and marketing and distributing them.
By contrast, the fact that a company has customers or users in a country has traditionally given that country only limited rights to tax the company’s profits.
This made more sense when the rules were developed, but technology has since weakened that connection. A company can now provide online services, sell advertising and reach millions of Australians, while carrying out most of its business activities overseas with no physical “presence” in Australia.
The result is an increasingly uncomfortable mismatch. Australian customers and users can contribute significantly to the profits of a global tech company. Meanwhile, Australia may have only limited rights to tax those profits.
This is not a loophole created by tech companies . It is largely the result of international tax rules governments themselves agreed to, but which were designed for a very different economy.
A disagreement about fairness
Countries have spent years trying to deal with this mismatch. One popular response has been the digital services tax . This is used widely in the world , including some European Union member countries, the United Kingdom, and some Asian countries. It typically taxes some of the revenue large digital companies earn from a country’s market at 3-5%.
Australia’s News Bargaining Incentive is not called a digital services tax. Its stated purpose is to support Australian journalism. But it performs some of the economic work that a digital services tax would otherwise perform.
If the century-old international tax rules do not adequately recognise that contribution of Australian consumers and users, why shouldn’t Australia, as a sovereign country, find another way to charge companies that derive substantial revenue from its market?
But from the US perspective, the same story looks very different. Countries agreed long ago how the taxing rights would be split.
Yet governments all over the world, including Australia, are increasingly introducing new taxes and charges that take away revenue that digital giants, overwhelmingly US companies, would otherwise retain.
What does tax sovereignty actually mean?
In response to the US criticism, Prime Minister Anthony Albanese has said Australia is a “sovereign nation” and his government will make decisions based on the national interest.
But sovereignty in international taxation has never meant complete freedom . While it is true a country has the power to make and enforce its own tax and non-tax rules, these powers ” may be only nominal “.
Australia, like other countries, has voluntarily accepted limits on its taxing powers through a network of tax treaties and international agreements.
More recently, it has adopted the OECD-led global minimum tax , which further constrains how countries can use their tax systems.
Tax sovereignty therefore does not mean Australia can impose whatever tax it wants. It means Australia retains the power to design its own tax system within the international commitments it has chosen to make.
An attempt at a workaround
Understanding this may help explain the design of the News Bargaining Incentive. It is structured as a “charge”, rather than a conventional tax on corporate profits, placing it outside many of the restrictions that apply to income taxes under Australia’s international tax treaties.
Australia may be within its rights to impose the News Bargaining Incentive, but that does not mean the US has to accept it quietly.
The Trump administration has already shown its willingness to use tariffs against foreign measures it considers discriminatory towards American companies.
Albanese is right that Australia is a sovereign nation. But sovereignty cuts both ways: Australia can pursue its national interests, while the US can use its economic power to defend its own.
The question is no longer whether the US government will notice. It is how far the US is prepared to go in response – and whether Australia will stand its ground.
