The EU Commission's digital proposals provide for both a short term interim solution and a longer term plan in respect of the tax treatment of digital transactions.
The short term plan is a 3% tax on the gross revenues of certain digital transactions, broadly based on where target customers are located. As an example, if a company in Ireland receives €100 in advertising revenue in respect of advertising targeted at French customers, €3 digital tax would be payable to the French authorities.
The rationale for the above is that the French customer data is regarded as creating value for the Irish company, hence it should be taxed.
The short term measures will only apply to large groups, with global turnover in excess of €750m and EU turnover in excess of €50m. However the longer term plans will apply to a much wider group of companies.
The proposals arguably run contrary to general tax principles, which look at where the value creation takes place, as opposed to where customers are located. There is considerable work to do to convert customer data into something that can be profitably exploited, an activity that would not necessarily take place in the country of the customer.
The digital tax is a turnover based tax, but posing as a digital/corporation tax and importantly, based on gross revenues. Whether or not the Irish company is profit making doesn't impact on the digital tax charge.
The digital tax payable is deductible against corporation tax profits, similar to irrecoverable VAT. It is not available as a direct credit against corporation tax payable. However it could potentially have a significant adverse impact on Irish corporation tax revenues, which have increased substantially in recent years. It also dilutes the benefit of our 12.5% tax rate as the digital tax element becomes a material tax cost for Irish based multinational groups, potentially dwarfing the tax benefits of our regime.
In our view, the interim proposals pose a risk to the competitiveness of companies based in Europe and could be economically damaging. The Commission itself acknowledges the limitations of its interim proposals but is keen to implement a "quick fix" while it continues its work on a longer term solution. As a longer term solution will likely take some time to develop, there is the danger that the interim solution stays with us for longer than expected.
In our view, the Commission should await the output of the significant work undertaken at OECD level on the taxation of digital transactions rather than implement what could be a damaging solution for Europe. We also believe that the optimal solution is one that focuses on where the value is created, not simply where target customers are based.
Aspects of the digital tax proposals could form part of the Commission’s CCCTB plans, which is a separate set of proposed tax changes that seek to tax all companies, not just digital, based on the location of sales, employees and fixed assets. While the CCCTB plans are at a less advanced stage, they too pose a risk to the Irish offering. Again, it is difficult to reconcile the direction of much of the OECD work on tax reform with the Commission’s CCCTB proposals, which would broadly penalise smaller countries while rewarding larger economies.
It is important to note that all countries retain a right to veto the proposed EU tax changes. While there is the possibility of a group of countries in favour of the digital tax proposals proceeding regardless under the “enhanced cooperation mechanism”, that is not the Commission’s objective. However, the possibility of some countries “going it alone” can’t be ruled out, which would also adversely impact on Ireland’s attractiveness, as well as our corporate tax revenues.
In summary, the digital tax proposals, if implemented, pose a threat to Ireland, arguably a significantly greater threat than the recent US tax reform package. In our view, the OECD work on digital tax should be allowed develop further rather than implement a potentially damaging EU only interim solution. Where things go from here is difficult to predict, given that there are countries massed on both sides on the issue.