The Digital Debate

Nov 05, 2018
Sunday Business Post, 4 November 2018

Just last week, two of the most senior executives from Apple and Facebook addressed a conference in Brussels about data privacy.  Their comments received limited attention.  But had they been talking about tax, both the CEO of Apple Inc. Tim Cook and Erin Egan, Facebook's Chief Privacy Officer could have been guaranteed headlines across the world.  The kind of headlines UK Chancellor Philip Hammond did attract when he mentioned in his budget speech how the UK was going to tax companies like Apple and Facebook in the future.

 

Hammond is proposing a 2% tax on revenues derived from search engines, social media and online marketplaces.  Before anyone loses the run of themselves, such a tax will only be imposed from April 2020, and then only on the very largest companies, and even then only on revenues derived from their businesses in the UK.  The UK government budget papers estimate that the new tax will bring in approximately £400million.  That’s not a small number, but remember that the UK currently collects annually somewhere in the order of £600billion sterling in total tax each year.  In that context £400 million is a flea bite, and slightly less than how much Hammond is proposing to devote to fixing potholes in minor roads in the fiscal year 2019.

 

Of interest and alarm to the likes of Ireland is the direction that UK tax policy on high-tech multinational enterprise is taking.  The EU has also put forward proposals for a digital tax, and the concept is high on the agenda of the OECD.  The philosophy behind a digital tax is that it moves the collection of tax away from the country where products are being created to the country where the user or consumer of that technology is located.  There is also the consideration that multinationals seem to be able to locate their profits in countries where the tax burden overall is lower, and thus avoid tax in a way not available to smaller indigenous businesses. 

 

For a country betting its post Brexit future on its ability to forge trade deals and alliances with countries outside of the EU, the timing of Hammond's announcement is somewhat unusual.  Just a few days before the UK budget was announced, the US Treasury Secretary Steven Mnuchin issued a statement on digital tax proposals.  He noted the “strong concern with countries’ consideration of a unilateral and unfair gross sales tax that targets our technology and internet companies” and cautioned against any partner country taking unilateral action in this area.

 

By that measure, the UK's latest announcement on digital tax seems to fly directly in the face of the interest of a vital trading partner in a post Brexit era.  The reasons for the US concern are obvious.  Most of the biggest digital companies are US-based, for the moment at least.  Every time a US company pays more tax in Europe, the share being paid to Uncle Sam shrinks. 

 

None of this is particularly good news for the likes of Ireland or indeed our allies in the smaller nations of the European Union.  We are supposed to be part of a common market, and common markets shouldn't favour one country over another based on market size.  Talk of a digital tax harms the attractiveness of any small economy, low tax or otherwise, as a locale for foreign direct investment.  The current EU digital tax proposals, far from adding to Irish Exchequer receipts, would actually cost us money – about €100m or so. This is according to Revenue evidence, albeit with several health warnings, presented to the Committee on Finance, Public Expenditure and Reform and Taoiseach in the early summer. 

 

These pressures prompt political decisions.  Are we in Ireland to succumb to the EU insistence to accept the Commission’s digital tax proposal?  Some reports suggest the pressure is growing.   If Ireland because of its small market size is going to lose out because of shifts in international tax policy, do we prefer to count that loss in corporation tax revenues or in jobs?  Over 25% of our employment comes from the multinational sector.  We saw this week that unemployment levels have settled at a 10 year low.  That is one statistic worth preserving. 

 

But can we continue to resist the European momentum towards tax harmonisation without the support of a traditional ally against such momentum, the UK?  And if we fail without the support of the UK at the first time of asking, how does that affect our capacity to resist other EU tax policies which would damage our economic model, such as the Common Consolidated Corporate Tax Base or the Financial Transactions Tax?

 

Perhaps digital taxes, if introduced, will have little distortive impact cross border investment.  The Hammond plan with its modest revenue targets lends credence to that hope, but the truth is that no-one really knows because there is no precedent we can follow.  More broadly, because digital taxes tend to divert tax into countries with the biggest markets, aggressive approaches to taxing high tech industry would push corporation tax revenues into the likes of Brazil, India and China.  That prospect, coupled with Secretary Mnuchin’s warning, should also give European policy makers pause for thought.

 

In the high tech debate, important issues such as consumer privacy come a poor second to the developing row over where that industry should pay its taxes.

 

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