Will Israel Become the First Nation to Tax Search Engines?

New law will harm competition, limit expression and hurt the Internet’s neutrality.

The Knesset Finance Committee has started debating a new bill dealing with copyrights, nicknamed the “Google Law.” The bill is designed to regulate royalties paid by search engines. According to the new bill, search engines such as Google would pay 7 percent of their annual income as royalties to content providers. These would be distributed among “information disseminators” through a union that collects royalties, a non-profit organization that would operate under the supervision of a committee headed by a judge, with participation of representatives from the ministries of culture, finance, justice and communications. According to the bill’s initiators, it would correct an injustice since “search engines make substantial financial gains from content that was created and developed after significant investment.”

There may be good reason to tax foreign companies that make a profit in Israel through virtual activity online, but the proposed “Google Law” is not the way to do this. First of all, the law is based on a string of unfounded assumptions. Search engines do not detract from profits made by content developers - they give it extra value through exposure, accessibility and site usage, giving users free services. Not only do search engines not take away any profits from content providers, they actually generate more income by increasing usage of their sites. Even in the absence of a law, there are already tools such as Google AdSense and YouTube that enable independent creators such as bloggers to generate content income through search engines, without relying on traditional marketing and collection services. This is done by sharing revenue from advertising on the search engines.

Secondly, it’s not at all clear that most of Google’s revenues derive from commercial newspapers, which serve as the main source of royalty payments. Google profits from advertising to web surfers and they use the web for diverse purposes, such as information gathering on Wikipedia, blogs and social networks, and participation in different forums, electronic commerce and use of online services. Are these sites not eligible for recompense as well? The bill is called a “new copyright law,” but the royalties are only intended for distributors of commercial content.

According to the bill, there is no connection between the search engine’s revenues and the activities of the content providers. In other words, even if surfers do not look for content on a site, so that the search engine does not refer them there, it will still be obliged to pay royalties and the content sites will be compensated. This will perpetuate a situation in which choice sites are subsidized, even if they are irrelevant or non-competitive, with no economic basis for their existence.

Who will decide which sites are compensated and for how much? A committee nominated by politicians. This mechanism will create a dependence between communications providers and politicians, which is concordant with shadier forms of government more than with democracies. Is this the way to guarantee freedom of expression on the Web, as the bill prides itself on doing?

Taxing search engines will impose a new obstacle to free competition between them. This bill will also harm the Internet’s neutrality and tighten the links between search engines and content providers. A search engine is a powerful tool that can greatly affect the accessibility of content and the public agenda. Anyone interested in the future of Israeli democracy should be concerned with the move towards centralizing control over content and access to information, and should worry about the deepening connection between search engines that control access and content providers. Antitrust authorities in the United States and Europe are already concerned about Google’s monopoly, and only in Israel are lawmakers trying to send Google and content providers into each other’s arms.

In contrast to positions stated at the Knesset committee’s debates, if the bill becomes law, Israel will be the first country to tax search engines. Even the law passed in Germany last summer specifies royalties only for copying news summaries into snippets, and applies only to designated news services such as Google News. The law was rapidly eviscerated of content once Google started asking news agencies for their prior agreement to forgo payments before signing up with Google, thus bypassing the new law’s requirements. Publishers were quick to sign up, not wishing to be excluded from Google’s services.

The rise of intermediaries on the Web will require supervision to ensure fair processes, equal access and neutrality of the Web. The new law will harm competition and favor larger content providers, limiting expression and hurting the Internet’s neutrality.

Eyal Toueg