All sectors need policies to encourage digitalisation while adjusting the pace of transformation so as not to upset those who löse
Years from now, we will surely say that the novel coronavirus (COVID-19) and 2020 were the turning points of digitalisation. During COVID-19, some economies were able to be digitalised and some not. With the support package announced against the impacts of COVID-19 in the USA, the Central Bank balance sheets expanded to a record, and the stock market rushed towards a record as well. Not all shares rise, however. With a closer look at the stock market data, we can easily see that only a handful of technology companies’ shares are the ones that rise. Amazon, Facebook, Google, Apple, Microsoft, and Netflix had a $1.9 trillion increase in their total market value in the first five months of COVID-19.
The rest shows no significant progress. As for the countries, I can recommend all countries to consider whether they will remain in the increasing or fixed segment of the stock market. One of the most significant determinants for digitalisation is whether country regulations encourage or bar innovation. In today’s world, regulations adopted in the analogue era are not sufficient any longer, and the laws and markets must adapt to technological transformation. The digital economy no longer thrives on public grants. All sectors need policies to encourage digitalisation while adjusting the pace of transformation so as not to upset those who lose. We can group the policy priorities under five categories.
DIGITAL PLATFORM REGULATION
We started using digital platforms such as sahibinden.com, yemeksepeti.com, and amazon.com more and more on a day-to-day basis. Digital platforms reduce transaction costs, and they increase the access of those who cannot participate in the economy. The platform business model, on the other hand, is the most effective method of shifting the supply to digital environments to meet the demand for digital environments. These platforms work in bilateral markets and bring users and service providers together. And the network effects that arise in one of these markets are naturally reflected in others. Establishing effective competition in platforms and protecting those who serve the platforms are among the main digital policy problems.
In order to solve these issues, international standards must be reached in platform regulations. Current platform regulations are not based on one single law. Ministries of Trade, Health, and Tourism, for example, regulate the platforms in the sector piece by piece based on their own regulations. If you ask me, bringing together these different regulations into one single legislation for digital platforms would benefit all the parties and provide clarity, and this legislation can take the European Union (EU) standards as its basis. This would allow avoiding price limits, and platform liabilities can be regulated into the safe harbour principle.
PERSONAL ENTREPRENEURSHIP REGULATION
The rapid progress in technology changes the traditional company structures all around the world, and companies are turning into platforms where they work with many individual entrepreneurs. This increases the effectiveness of both large companies and individual entrepreneurs in the economy by allowing them to focus on the activities they do the best. The individual entrepreneurship economy (gig economy), which has started to become widespread in many countries, is emerging as a new access to the economy for individuals who cannot achieve formal employment or do not want to work within a company in many cases.
In order to support the new sectors created with the developing technology, especially the USA and certain European countries provide minimum wage and insurance opportunities to the individual entrepreneurship economy employees, and what they need in this regard are regulations to pave the way for flexible employment. And it will also be appropriate to reduce the costs of fixed taxes such as financial consultancy and stamp tax required to establish sole proprietorships.
STRENGTHENING THE HUMAN RESOURCES OF DOMESTIC DIGITAL COMPANIES
Today, we see global companies employ Turkish software developers as it provides benefits to both employees and companies. Foreign companies can employ our quality software developers at more affordable prices than those in their own countries due to the increase in the exchange rates. According to Endeavor Association’s report, an average software developer in Turkey is paid around TRY 3800-6000 and also pays the income tax. A software developer who earns €4,000 monthly (around TRY 40,000) working for a foreign company, on the other hand, benefits from tax exemption with article 23 paragraph 14 of the Income Tax Law. In order to prevent this unfair competition, the exemption that allows foreign companies to not pay social contributions for Turkish employees and the fact that employees are exempt from taxes must be abolished.
The physical activity basis used to determine tax values began to lose their meaning with the digitalisation. Because the main asset of companies in the digital economy is not physical anymore, it is the collected data. For that very reason, many countries started taxing global companies that make money by collecting data on turnover. Digital Service Tax in Turkey was introduced for the same reason. However, we also apply a 7.5% tax on the turnover on e-commerce platforms that create supply chain and physical value. And it is not fair to lump together the e-commerce companies and non-taxpaying digital platforms that use Turkey’s data to show targeted advertising. Digital advertising platforms operate with an average profit margin of 30% and e-commerce platforms around 3%. So, it will be beneficial to reduce the tax rate for e-commerce platforms down to 1%. To compensate for the lost tax revenue, a slight increase in the tax rate in the digital advertising category can also be considered.
The fintech market, which has seen the rise of the most start-ups and innovation areas in recent years, has a large place in the digital economy. And this market does not only affect the digital world. Fintech is quite important in paving the way for structural transformations that will positively affect the rest of the economy. In order to keep up with developed countries in this field, it will be beneficial to establish a “Fintech Council” with an official structure where banks, financial institutions, insurance companies, and fintech companies can be together with regulatory institutions. It is necessary to pave the way for new fintech innovations and allow the credit products of fintech organisations. Competitive development of savings tools such as debtbased crowdfunding, crypto, and metals through digital platforms is also a fundamental step.
Founder of Ussal Consultancy Ussal Şahbaz