Deciding how best to tax digital business is proving a tough nut to crack internationally, with the UK and Europe taking matters into their own hands
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This article was first published in the April 2019 Ireland edition of Accounting and Business magazine.
Amid growing concerns that large, multinational companies are failing to pay their ‘fair share’ of corporate tax, the tech giants have been singled out by governments for particular attention, as they can sell their services into foreign jurisdictions without creating a permanent establishment, and thus avoid significant tax bills.
With the consultation ended on the latest proposals from the Organisation for Economic Co-operation and Development (OECD) on the tax challenges of the digital economy, now is a good time to take stock and evaluate how close the international community is to consensus on how best to tax such companies by the end of 2020.
Going right back to the original OECD BEPS (Base Erosion and Profit Shifting) project, the first of its 15 ‘actions’ for equipping governments with tax avoidance tools looked specifically at how digitisation is affecting international tax rules. The fact it was action 1 shows the importance attached to the issue at an international level.
The OECD released an interim report in March 2018 and a discussion report in February 2019, and further policy notes in October 2018 and January 2019. The 2019 note focuses on two ‘pillars’ for further discussion.
The first pillar considers how the existing rules that divide up the right to tax the income of multinational enterprises between jurisdictions could be modified to take into account the changes digitisation has brought to the world economy. This will mean re-examining the ‘nexus rules’ (namely, how to determine the connection a company has with a given jurisdiction) and the rules on how much profit to allocate to the business it conducts there.
The second pillar aims to resolve remaining BEPS issues and will explore two sets of interlocking rules designed to give jurisdictions a remedy in cases where income is subject to no taxation or only very low taxation.
‘Significant step forward’
Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, believes the international community has taken a ‘significant step forward’ toward resolving the tax challenges arising from digitisation. He says: ‘Countries have agreed to explore potential solutions that would update fundamental tax principles for a 21st-century economy, when firms can be heavily involved in the economic life of different jurisdictions without any significant physical presence and where new and often intangible drivers of value become more and more important.’
Saint-Amans adds that the digital economy exacerbates risks, enabling structures to shift profits to entities that escape taxation or are taxed at only very low rates. ‘We are now exploring this issue and possible solutions,’ he says.
But in the meantime, some jurisdictions are pursuing their own solutions. The UK has concluded a consultation on the introduction of a digital services tax from April 2020 ‘to ensure certain digital businesses pay tax reflecting the value they derive from UK users’.
The proposed tax will come in the form of an additional 2% tax on certain UK-generated revenues of search engines, social media platforms and online marketplaces. It will apply only to companies that are profitable and make annual global revenues from certain services of at least £500m.
The European Commission has already proposed its own digital services tax, with a rate of 3% on companies with worldwide taxable revenues above €750m (€50m of which must be in the EU), from 1 January 2022. However, if discussion on the OECD proposals has made sufficient progress, the EU may postpone or cancel its own proposals.
Of course, much of the tax burden created by these proposals will be borne by companies based in the US, and Ireland is the home to the European headquarters of many US technology corporations. There can be little doubt that the low level of Irish corporation tax (12.5%) has helped make the country very attractive to those that wish to do business in Europe. So it is perhaps not surprising that Dublin should oppose the EU’s digital tax plan.
In October last year, Ireland made a joint submission, along with three other states (Sweden, Denmark and Finland), warning that the EU proposals breach international treaty obligations, specifically those agreed in the OECD’s BEPS framework. Then in November, the EU’s proposal of a 3% tax on digital services was effectively blocked by objections from the Republic and other member states.
Last year Kate Levey, a Revenue official, outlined how the Republic would ultimately be a net loser from the proposed EU digital services tax, with analysis suggesting such a tax would yield only around €45m a year, with lost revenue of €120m to €160m annually.
However, in February this year, Irish finance minister Paschal Donohoe reportedly told his French counterpart and architect of the EU’s digital tax, Bruno Le Maire, that Ireland was willing to work on a joint position on digital tax at an OECD level. ‘The taxation of digital companies needs to change,’ says Donohoe. ‘We have to find models that ensure that companies in the digital economy pay their fair share of tax.’
Spain and Italy have already put forward their own proposals, both with a 3% tax rate. And in December 2018, France announced it would introduce such a tax from 1 January 2019 after the difficulties of reaching an EU-wide agreement became clear. However, noises from Paris suggest that a deal at EU level might still be possible. Austria has also announced a similar move, although not until 2020, which is when the OECD is expected to reveal its own final proposals.
Outside Europe, Australia is considering responses to its digital economy discussion paper, published last October. While the Treasury paper does not provide any clear recommendations, according to EY it implies ‘that an interim digital services tax may be warranted given the likelihood that no long-term global solution is in sight’. The firm adds: ‘Australia has a strong record as a leader in tax policy initiatives internationally including its adoption of BEPS actions and two measures largely unique to Australia and the UK – namely, the multinational anti-avoidance law and diverted profits tax.’
Meanwhile across the Tasman Sea, the New Zealand government announced in February that it too will consult on introducing a digital services tax.
Phil Smith, journalist
CPD technical article
"The digital economy exacerbates risks, enabling profits to escape taxation or be taxed at only very low rates"