Rock and hard place for Irish tax regime
Last week the Organisation for Economic Co-operation and Development (OECD) proposed breaking a taboo in international corporate taxation that countries only have a right to tax activities from companies that have a physical presence on their soil.
Instead, the OECD proposed that countries should have a right to tax a proportion of the global profits of highly profitable multinationals, particularly digital companies such as Facebook, Amazon, and Google, regardless of where they are located.
The proposals which have the support of most of the EU member states, have the potential to cut deeply into Ireland’s take of the corporation tax paid by the multinationals , who service the European, Middle East and African (EMEA) markets from here.
Finance Minister Paschal Donohoe and his colleagues in Government may rue the day they pushed back on EU regulations to bring in a digital tax last year, in favour of waiting for an OECD solution. The effect on Ireland could go well beyond the lost corporation tax revenue. Jobs have come with the intellectual assets located at the European head office and data centres here.
The scale of the gain from location and hence the potential loss can be seen from other OECD reporting that more than 60% of business investment in Ireland has come from the intangible assets of the global digital companies. By comparison, the average share of intangible assets across global markets is only 10% of total business investment.
The winners would be large countries including the US, China, UK, Germany, France, Italy, and the African and Asian economies.
They would see an increase in their rights to levy tax on corporate income earned from sales in their territories. The OECD has said the proposed taxation framework is needed to address the digitalisation of the world economy and is part of wider efforts to restore stability and certainty in the international tax system.
The proposal, which is now open to a public consultation process, would re-allocate some profits and taxing rights to countries where multinationals sell their products and services.
It would ensure that these large corporations with large sales in places where they do not have a physical presence, be taxed in such jurisdictions. This would be done through the creation of two new rules — where the tax should be paid and assessing the portion of profits allocated to countries where the profits are generated.
For countries such as Ireland which host multinationals with a physical presence, the OECD proposes a new formula to allocate a fixed rate of return on the local activity in the country. For the remaining of what they call the “residual profit” it will consult on ways to put this formula together.
The OECD indicated over the summer that its proposals were likely to win support from the big global economies and this, it hopes, will persuade countries not to go down a unilateral route with their own domestic digital sales taxes, such as that proposed by France and the UK.
The Paris-based international organisation is seeking agreement in principle from the G20 countries by the end of January so it can work up detailed rules.
The OECD expects extensive international infighting over the exact parameters of the new rules. The profit thresholds for big companies facing the new rules has still to be decided, but officials in Paris said there is an emerging consensus.
In an attempt to gain support from Irish and other negotiators who benefit under the current taxation rules, it has alluded to some form of “top-up” provision, should the new rules deliver less tax revenues.
This may protect Ireland’s extensive slice of corporation taxes, but the risks remain at an elevated level.
The Government some years ago decided to back the OECD approach, and reject the EU plans that encroached on its sovereign rights over taxation.
It’s now between a rock and hard place.
