The European Commission is about to unveil its proposals for the EU’s digital tax strategy. Major EU states like France and Germany want to take action now, but Ireland stands in their way.
Last week, the German coalition talks laid out an agreement that included proposals for the "fair taxation of large companies". The document singled out Google, Apple, Facebook and Amazon (sometimes called 'GAFA’ for short) as examples. These brands have all come under fire in the past over allegations of tax avoidance, and they have denied claims they don’t pay what they owe in taxes.
At the same time, French Finance Minister Bruno Le Maire launched yet another attack on GAFAs. "It’s not possible, not sustainable, that we tax manufacturing industries while billions in profits earned by GAFAs on European soil evaporate," he told the press. "We want a fair taxation of digital giants that creates value in Europe in 2019."
"Kissing the feet of GAFAs won’t ensure our prosperity," Le Maire said. "European citizens would struggle to understand why the taxation of digital giants at a European level only raised tens of millions of euros."
While the French government supports taxing the revenue of tech companies rather than profits in order to make tax avoidance much more difficult, the German coalition talks point to the common consolidated corporate tax base (CCCTB) as a way of taxing the profits of online businesses.
According to NERA Consulting Chairman Alexander Voegele, there is real impetus for an EU-wide digital tax model and this concerns some taxpayers more than others. But there is still a lot of room for tax planning, especially when national governments engage in unilateralism.
"Unilateral action does complicate matters, but it also opens up great opportunities for tax and transfer pricing planning," Voegele told International Tax Review.
This is especially important as some countries have moved ahead on innovative proposals to tax online companies. The Italian government has already implemented an equalisation tax to tackle the problems thrown up by new business models from the high-tech sector.
Italy’s digital tax may have set a precedent for other EU countries to follow. So far Austria, Bulgaria, Greece, Portugal, Romania and Slovenia have all come out in support for the concept. Yet many EU states remain sceptical, particularly low tax jurisdictions like Ireland.
Winning Over Ireland
As the EU relies on unanimity to establish common goals, the European Commission cannot just impose a new system of digital tax and it must negotiate with the sceptics before it can move forward. A minimum of 16 member states need to back an initiative for it to be passed. This is why European Commissioner Pierre Moscovici has made the case for Ireland to support an EU-wide digital strategy.
"Due to our rules, which are not the best in taxation, it’s always possible to resist – because unanimity is needed," Moscovici told the press on February 9. "But I think it’s not in Ireland’s interest by any means to resist when we present proposals on digital taxation, so that the giants of the internet could just pay their fair share of tax."
"That’s what all citizens expect and I think that Ireland should be in the move. We will try to bring proposals that can create consensus," the commissioner added.
"Ireland's firm view is that any such measures should be agreed at the OECD level," John Ryan, partner at Matheson, told ITR. "When the commission issues its proposals next month, we will be closely watching the initial reactions of those member states that so far have not voiced their opinions in the debate. That will give the best indication of whether the proposals are viable."
According to Dan O’Brien, chief economist for the Institute of European and International Affairs, the Irish government "will not support the proposal on the table in Brussels for a common consolidated corporate tax base". The Irish authorities remain committed to exercising its veto to blocking such a plan. Whether this extends to digital tax may depend on what the final framework looks like.
"Ireland will continue to actively engage with work in the area of the digital economy at both OECD and EU level," a spokesperson for Ireland’s Finance Department said. "We believe that any reforms in this area must ultimately be globally agreed, evidence based, sustainable in the long run and focused on aligning taxing rights with the location of real substantive value creating activity."
Although the next German coalition may want to see the CCCTB used to address the problems of digital tax, this plan is unlikely to win over Ireland if it means changing its corporate tax regime. This may mean the EU will have to find a compromise.
"Without Ireland we cannot have it, but I’m sure that we can find solutions for Ireland," Moscovici said. "This is the tax system of the 21st century. We are living now with the system of the 20th century. It doesn’t work for modern economies."
"Ireland is not opposed to examining tax proposals to address the increasing digitalisation of the global economy," Ryan said. "Ireland simply believes that it would be counter-productive for the EU to forge ahead with its own measures. Any proposals in this area should apply both within and outside the EU. That's the compromise."
Both the EU and the OECD are looking for international answers to the challenges of the online economy. While the EU has pledged to act in tandem with the OECD, the European Commission has left open the possibility of acting on its own to establish its own parallel standards for digital tax.
"Global solutions are needed to ensure tax is paid by companies where value is created," the Irish spokesperson said. "That is why Ireland has been a committed participant in, and strong supporter of, tax reform efforts led by the OECD through the BEPS process."
"The forthcoming OECD report will be published in spring 2018," the spokesperson continued. "It will provide important input into the ongoing consideration of where value is created in digital business."
The issue of digital tax is not going away any time soon. It’s not just up to France and Germany. If the EU fails to reach a consensus, the OECD’s proposals will likely become the new standard until an agreement with countries like Ireland can be secured.
This article was first published by the International Tax Review on Wednesday, 14 February.