On 21 September 2017 the European Commission sent out its latest communication calling on the European Parliament and international bodies to undertake and engage in substantial, far reaching reforms of the taxation systems both within and outside of the EU, to ensure that the digital marketplace is taxed in a manner it considers to be fair and effective.
The Commission's communication to the European Parliament and the Council, entitled 'A Fair and Efficient Tax System in the European Union for the Digital Single Market' (the "Communication") details how the current taxation rules in the eyes of the European Commission, "no longer fit the modern context, where businesses rely heavily on hard-to-value intangible assets, data and automation". The Commission made a number of key points in the Communication, including:
- A warning that if reforms are not put in place to effectively and fairly tax the digital market, it will destabilise the playing field for businesses. The Commission goes on to claim that a failure to implement the reforms it has outlined will risk "EU competitiveness, fair taxation and the sustainability of Member States' budgets".
- Stating that the guiding principle for the tax reforms it is proposing is that all businesses operating within the EU should be taxed where their profits and value are generated. In a marketplace that is increasingly digitised, borderless and globalised, current taxation rules and schemes are, in the European Commission's view, incapable of dealing with the new digitised business models, from Amazon to Netflix to Facebook.
- Outlining how business models have changed radically from the concept of businesses being tangible 'bricks and mortar' entities, but taxation models have not. As a result, the Communication states that while traditional domestic business models have an effective tax rate within the EU of 20.9%, digital domestic business models have an effective average tax rate across the 28 EU Member States of 8.5%.
- In a thinly veiled reference to the ongoing Apple taxation controversy, stating that cross border digitalised businesses benefit even more, with "aggressive cross-border tax planning that can bring down the tax burden to effectively zero."
- The contention that continued growth of the digital economy means that such "unequal" taxation rates cannot go unchecked, with close to one third of the overall industrial output in Europe being due to the uptake in digital technologies.
- The growth in the digital marketplace has been stark. While in 2006 only one technology company was among the top twenty global companies by market capitalisation, by 2017 that figure has now grown to nine, accounting for 54% of the total market capitalisation of the top twenty companies. This figure is only going to grow in an increasingly digitised world, and a new generation of information technologies – the internet of things, artificial intelligence, robotics and virtual reality – as key areas for future growth of the digital marketplace.
Suggested Paths of Reform
The Commission identifies two inter-connected issues that must be addressed prior to implementing any reforms. The first issue is how to establish and protect taxing rights in a country where a business only has a digital presence and no physical presence. The second issue is how to attribute profit in new digitalised business models driven by intangible assets, data and knowledge.
Two paths to implementing the needed reforms are suggested in the Communication. Firstly, it suggests that the taxation of the digital economy is woven into the existing international corporate tax framework. The Commission suggests that such reforms would ensure consistent and coherent taxation of the digital economy worldwide, but notes that current political realities may inhibit fast, effective reforms.
The second path for implementing reforms is that in the absence of a unified approach at the international level, reforms instead take place at EU level through the implementation of the Common Consolidated Corporate Tax Base (the "CCCTB"). The Commission states that the CCCTB provides a framework for revised tax rules that allocate profit of multinational groups "using the formula apportionment approach based on assets, labour and sales that should better reflect where the value is created".
In a speech made in September of this year, European Commission President Jean-Claude Junker suggested that the requirement that tax reforms such as the CCCTB and those regarding the digital economy could be implemented without the unanimity of all EU member states being required. Such comments were met with concern in this jurisdiction, which relies heavily on foreign investment from digital marketplace giants such as Apple, Google, Amazon and Facebook.
The CCCTB has been through several iterations and developments over the years, and has its roots in a European Commission paper from 2001. Ireland has long been a strong opponent of the implementation of the CCCTB as this jurisdiction has a highly-developed, attractive corporate tax code that has remained the cornerstone of the Irish economy for over twenty years.
In 2016 Government appointed Mr. Seamus Coffey as an independent expert tasked with reviewing Ireland's corporation tax code. The 'Coffey Report', as his findings published in February 2017 have been referred to as in the media, found that Ireland has a well-functioning and transparent corporation tax code that was in line with the OECD and EU Directives. More revealing however, was the analysis that multi-national enterprises constitute 80% of Irish corporation tax receipts in 2015. It is no wonder, then, that Ireland views any proposed reforms with at the very least heavy scepticism.
Any reforms in this area would impact on Ireland's current corporation tax regime, and its corporation tax rate of 12.5%. Speaking at a recent tax summit in Dublin, Minister for Finance Paschal Donohoe stated that "we very much favour the OECD as the appropriate forum". The OECD will outline further reforms under the Base Erosion and Profit Shifting (BEPS) process early next year, and such reforms will not threaten Ireland's current corporation tax regime.
Minister Donohoe was robust in his opposition of any amendment to current European Union law that would remove the requirement of unanimity in implementing tax reforms, stating
"Let me be clear, the Irish Government would not favour any such change. Our view is that tax is a matter of Member State competence and that unanimity should remain. This has been a long standing approach of Ireland, and indeed many other Member States, and there is and will be no change in that policy."
This view was re-iterated in Minister Donohoe's Financial Statement regarding the 2018 Budget, where he stated that
"We have a stable and competitive corporate tax system, which is internationally recognised as one of the most transparent in the world. Our position is clear. The 12.5 per cent tax rate is, and will remain, a core part of our offering."
The Irish Government's position is that any reforms of how digital goods and services are taxed should be carried out at an international level. Speaking at the Dublin Economics Workshop on 23 September 2017, Minister Donohoe stated
"Ireland remains committed to global tax reform and believes that global solutions are needed to ensure tax is paid by companies where value is created. 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."
Minister Donohoe went on to warn of the dangers of implementing such type of reform solely at EU level without considering the global impact of such reforms, stating "Applying different rules within the EU to what is being applied globally is likely to result in double taxation and greater uncertainty."
Commission Calls for Decisive Action
The Communication called for a strong, ambitious approach to the taxation of the digital economy in the immediate future. It was used as a platform for further discussion on this issue at the Tallinn Digital Summit that took place on Friday 29 September 2017. In the international context, the Commission has identified the presentation by the OECD of an interim report on the taxation of the digital economy to the G20 in early 2018 as an important milestone for the implementation of reforms.
The Commission recognises the complexity and difficulty in implementing the reforms it deems necessary. However, at EU level its goal is to have the Council conclusions on the matter settled, with a coordinated EU approach set out by the end of the year, with a full proposal by Spring 2018.
The aggressive reforms and ambitious timeline for implementation outlined in the Communication can be seen as another shot across the bow from Brussels to Dublin over Ireland's corporate tax system, and the Communication must also be considered in the wider context of the ongoing Apple tax dispute.
Despite the Commission's proposals outlined in its Communication, the reforms are unlikely to see implementation in the European Union for the foreseeable future due to the current rule requiring unanimity. Ireland would most likely not be the sole EU member to oppose such reforms, with Denmark, Luxembourg, Malta, the Netherlands, and Sweden having previously voiced opposition to the implementation of the CCCTB. The UK has also previously objected to the CCCTB.
As the above statements of the Irish Government and Minister for Finance have made clear, Ireland will continue to offer a competitive, transparent corporate taxation scheme. The digital economy is itself an extension of the wider global economy, which continues to become increasingly interconnected and digitised. The Irish Government is therefore committed to ensuring any future reforms of taxation surrounding the digital economy are implemented at a global level.
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