By Seamus Coffey
When it comes to tax the question is usually “how much” but for the taxation of the digital economy a more important question is “where”.
Countries pushing for action are those which don’t collect a significant amount of tax from digital companies at present. That is not because these companies don’t pay much tax.
In their most recent financial years, Apple and Google made cash tax payments of $12bn (€9.76bn) and $6bn respectively for corporate income taxes.
These payments were around 20% of their pre-tax income with the largest share of those payments made to the US.
Since 2012, Apple and Google have paid over $80bn in corporate income taxes. France and Germany want a slice of that pie and look enviously at Ireland which is getting some of it.
One of the key guiding principles of the OECD’s Beps project is that profit should be linked to substance.
Ireland has had much success in attracting investment and employment and with raising corporation tax.
It is now more dependent on corporation tax receipts than any country in the EU bar Luxembourg where more than half of its company tax comes from banking and financial services.
In 2016, Irish corporation tax receipts were the equivalent of €1,600 per capita. Revenue figures show 80% of this was paid by foreign-owned companies.
In Germany, corporation tax receipts were just over €1,000 per capita, and in France, they were under €900.
Relative to our size, Ireland has long outperformed other EU countries for investment from and employment with US companies. We are outperforming on tax receipts as well.
Each year in Ireland, US companies pay around €6bn to their 100,000 direct employees, buy around €4bn of goods and services from Irish suppliers including indirect employees, undertake around €3bn of capital spending and pay around €4bn of corporation tax and other charges such as commercial rates.
That is €17bn a year, every year.Linking profit with substance benefits Ireland but this approach may not be appropriate for the digital economy.
The Commission has proposed a “comprehensive solution” to the taxation of the digital economy but as that requires the introduction the Common Consolidated Corporate Tax Base and changes to hundreds of tax treaties it has little chance of being implemented.
It has an interim “targeted solution” which is a turnover tax rather than a profit tax. The targets are Google, Facebook, Twitter, Instagram, and others.
These are platforms that have hundreds of millions of users but there is no revenue to tax between the user and the company.
Instead, the Commission proposes a tax be levied on the advertising revenue generated--and based on the location of the users’ eyeballs.
If a Spanish company buys advertising on Facebook in Dublin targeting German users, Facebook will have to pay a tax of around 3% of the relevant turnover to Germany.
It is not clear if this would result in higher prices for online advertising but from a German perspective, it is achieving an objective: Collecting more tax from online companies.
If a Japanese company buys online advertising from a company in Australia and also intends targeting German users then the turnover tax will also be due to Germany. There is no transaction in the EU but the tax will be paid in the EU.
The draft proposal says this can be achieved by a self-declaration system but that seems optimistic.
If it proves difficult to collect the tax on transactions that happen outside the EU, some companies may simply move operations outside the EU.
As a disproportionate beneficiary Ireland would be a disproportionate loser.
The old rules on profits and substance are being updated. We do need new rules for the digital economy.But a half-baked turnover tax is not it. We need rules for profit and substance in the digital economy.
The OECD is working on getting agreement across 110 countries. Securing agreement will be extremely difficult but it should be let try.
Seamus Coffey is head of the Irish Fiscal Advisory Council