Digital Taxation - Who will be calling the shots?

Mar 26, 2018

Sunday Business Post, Analysis, 25 March 2018
The EU Commission's attempt this week to get the European Council – the leaders of the EU member countries – to buy into a levy on the sales of digital companies may well prove to be a watershed.  The Commission appears to have gone too far on its attempts to reform European corporation tax policy from the centre.  This time they really got it wrong.

It's a bad week to be seen to be defending the interests of high-tech multinationals.  This is a week when, against a backdrop of the Cambridge Analytics revelations, Twitter has been used to encourage people to sign off Facebook.  Nevertheless, any tax proposal has to be workable and from the very outset the Commission’s digital tax proposals to put a levy on the sales of some web based industries were ill-advised.

The European Council President, Donald Tusk, has been offering leadership on issues when it really matters - when the EU Prime Ministers congregate every few months.  In a briefing note to the EU leaders last Tuesday, Tusk fired some warning shots in advance of last Friday’s EU Council about the digital tax proposals.  He acknowledged that there were shortcomings in most taxation systems when it comes to taxing the digital economy, but also pointed out that they needed an international solution, rather than merely an EU-based one.  “Money and revenue flows” he said “ultimately need to be seen globally, not only in the European context”.

In that he is completely correct.  Fortress Europe's attempts to tax global multinationals will never work, because their targets can operate well beyond the EU.  Short-sighted attempts like the digital tax proposals will only serve to drive commercial activity away from Europe, not just Ireland.  Europe is of course an important market for high tech industry, but no commercial entity of any type will persist with a market where the costs of doing business are too high relative to other markets.

No Quick Fix

A big part of the idea behind the levy on sales by digital companies was that it would be an interim measure.  The levy would apply a quick fix solution to a burgeoning problem.  There was never any prospect that a Europe-wide levy, involving 28 separate revenue authorities and charged on perhaps millions of individual sales could be implemented in short order. 

Some years back, the EU Commission introduced an online system, called MOSS, for collecting VAT all across Europe.  Unlike corporation tax, VAT is a largely pre-agreed EU tax, so the Commission can do such things without too much political fuss.  As it happens, MOSS impacted on many digital economy companies.  Some countries, Ireland included, got the operation of MOSS right fairly early on.  Other countries continue to struggle with these VAT requirements.  It is not clear how the Commission experts could have disregarded these practical experiences of trying to administer a new tax charged on turnover across Europe.

Making digital tick

In parallel with the EU, the OECD was also working towards a new tax solution.  Key to the OECD's work is the identification of what makes digital companies tick.  Digital business models tend to rely on presence rather than substance, clicks rather than mortar.  The value of their intellectual property (patents, copyrights and the like) ranks more important than the value of their tangible assets (factories, mines) even if they have any.  The involvement of the customer is critical.  This is why traditional taxation methods are struggling.  Traditionally companies are taxed by reference to the location of their decision-making processes, and where they carry out design and manufacture.  Where their market is located is not a key consideration under the current tax rules.  It may become critical in future years.

New corporation tax rules which rely on market presence will go hard on countries which have small indigenous markets.  It is surely not in the interests of any country outside of the G20 group of nations for there to be taxation solutions which place the emphasis on the location and size of markets.  The likes of Ireland, Belgium and the Netherlands simply could not compete on tax grounds for the kind of foreign direct investment which they have done in the past.

No veto

By getting the digital tax proposals so wrong though this week, the EU Commission has effectively surrendered future multinational tax policy design to the OECD.  The OECD approach may work better for smaller countries, because it involves a refinement of existing ideas of where companies are established and where profits should be allocated.

If Ireland wants to preserve its corporation tax streams which make up 15% of all tax collected in this country, and the jobs that those industries bring with them, we need to engage fully and robustly with the OECD as it develops its tax proposals further.  We cannot sit quietly at the back of a room, hoping bad things don’t happen.  Ireland will have to be involved in the shaping of proposals at the OECD which we can live with.  We might not in future have the power to veto new tax rules that don’t suit our economy.

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland