What would the proposed EU moves on digital tax mean for Ireland?
The proposals carry two dangers for Ireland. One is a threat to our corporation tax revenues. The second danger is that this makes Ireland a less attractive location for US multinational investment as the tax advantages of establishing here could reduce significantly. A Revenue Commissioner's paper on the issue written a few months ago said Ireland was likely to be the member state worst hit by the proposed EU tax changes.
How would this hit our tax revenues?
The goal of the proposals is to raise more tax from the big digital players like Facebook, Google, Amazon and so on. This would involve raising more tax in big markets where these companies have most of their customers. In turn this would mean they would pay less tax in smaller exporting markets such as Ireland. We currently get significant tax receipts from the digital players because many book their European profits in their EU headquarters, many of which are based here. While only a portion of these profits are exposed to tax, the resulting revenue is still important to the Irish exchequer.
The longer term EU plan is to change the way these companies are taxed and recognise their digital “ presence” in bigger markets as something which can be subject to corporation tax by the member states. This, together with EU plans to create a common base for corporation tax across the EU poses a significant threat to our corporate tax base in the years ahead,
And in the short term?
The European Commission’s proposals accept that this longer-term plan will take time to take shape. The OECD has also put forward its own plan in this area and there will be attempts to align the two and get international agreement However the Commission says short-term action is needed, too, and so it has proposed an “interim tax” on the revenues big digital companies get from selling certain services online. Specifically, the proposal is to tax revenues which the companies receive from targeted online advertising and from providing platforms for buyers and sellers. This would be an interim measure, which would be phased out when a longer-term solution is found. The proposed rate for the tax – which would apply as an indirect tax on sales – is 3 per cent and the Commission reckons this would raise around €5 billion a year.
What would this mean for Ireland?
It would have an impact on our tax revenues. This is because the money paid as part of the digital services tax could be deducted as an expense from European profits declared in Ireland. This is not straightforward as the companies involved use a variety of tax arrangements and these have changed in recent years. We also don’t know the full breakdown of tax paid by the companies which will be subject to the tax, or how they calculate what to declare here and what to declare in other jurisdictions. Tax accountants reckon that the immediate cost to Ireland were the interim digital services tax to be introduced could run in the low hundreds of millions of euro from our corporate tax revenues which were €8.2 billion last year. However the longer term hit from reform in this area could be more significant.
Would it reduce investment here by the digital players?
Yes, it could. The tax considerations facing these companies are changing quickly, due both to the US tax reform plan which will lead to them paying more at home and also the EU changes. Combined, these two forces could significantly reduce the tax advantages of locating in Ireland for the big US players. US companies will continue to invest around the world, of course, and Ireland will remain an attractive location, but one of the cards we have played to attract investment here could lose a lot of its value. In turn this could hit future investment and job creation and lead to a wider hit on our taxes.
Will it happen?
Reform of tax paid by digital companies is now inevitable. The controversy over recent years about how little these companies pay on taxes earned outside the US has ensured this. The only question is how much more they will pay and where they will pay it.
Ireland is in favour of the reform plan put forward by the OECD, which has achieved some results, but slowly. The OECD last week put forward its own longer-term plan for the digital sector, which it hopes to finalise by 2020. However the big EU players are impatient and want to move more quickly. So they have got the Commission to put forward its own reform plan including, crucially, the interim tax proposal.
The interim proposal is an unusual approach as it would tax revenues, not profits and would be restricted to big digital companies. It has already met strong opposition from the US and the American Chamber of Commerce in Ireland has said it is “ most concerned about the economic damage that taxes on turnover could cause.”
Corporation tax measures require unanimity among EU states so Ireland could veto the interim tax, or longer term moves. There is debate about whether the other countries could decide to continue without us if this happened.
A key thing to watch at this week’s EU summit is now many of the other smaller member states line up with us to oppose it. At a time when we are relying on EU support on Brexit, this is tricky politically for Ireland. The current mood towards the big tech players in the light of the Facebook controversy will only add to pressures to move ahead and put a shot across their bows. However it also appears that some of the bigger countries, including Germany, have reservations about pushing ahead now, partly because of fears that it could stoke tensions with the US.
