Tech giants should pay tax where economic activity really takes place
Opinion piece by Eva Joly, a French Green MEP Independent Commission for the reform of Corporation Tax (OCRICT) and Christian Aid Ireland's Head of Advocacy and Policy, Sorley McCaughey.
As the recent scandal over Facebook and the company Cambridge Analytica has shown, many companies operating in the new “digital economy” are, essentially, extractive industries. They mine and sell data on an immense scale. The ephemeral nature of this digital activity makes it hard to pin down where activity is actually taking place and where “value” is being created.
In reality of course, the global tax system has been failing to adequately align taxation with economic activities and value creation in a meaningful way for a long time. In highly integrated businesses, it is simply not possible to clearly identify what creates value . However, patents, royalties and other intangible assets are regularly presented by multinational companies as value creators and this has led to opportunities for some smaller European countries like Ireland, through a “competitive” tax offering, to secure the presence of many global tech companies who make their money elsewhere but declare their profits in Ireland.
The European Commission’s proposals to introduce a digital services tax aims to address the tax challenges of the digital economy as part of a wider process of tax reform within the European Union.
We agree that a digital services tax on the provision of certain digital services is an encouraging interim measure, but the reality is that the entire system is no longer fit for purpose and needs fundamental reform.
It is increasingly clear that digitalisation has exacerbated the unsuitability of current international tax rules. And indeed the European Commission has also outlined more significant proposals for the longer term, to change the ways in which companies are viewed to have a “digital presence” in a country (based on numbers of users etc), and therefore the way in which they are taxed.
This will result in tax being paid in countries where the economic activity is actually taking place, rather than in the place where sales are notionally made or booked (eg Ireland).
It is also clear from these proposals, and other proposals under discussion, that the commission wants to move ahead and accelerate the global agenda for a reform of tax rules instead of waiting for a hypothetical move from the OECD.
The EU is taking the lead to abandon the fiction that a multinational consists of separate independent entities that trade with each other and can be taxed separately. Instead the EU is moving towards the “unitary” taxation of multinationals (treating them as a single global body with a single set of global profits), as advocated by the Independent Commission for the Reform of International Corporate Taxation in their latest report. The European Parliament has already made some important progress in this regard, by recently approving the proposals for a common consolidated corporate tax base .
These moves could be a game-changer in tackling tax-avoidance by global corporations in Europe. It constitutes a positive step towards a more just world, by establishing a fairer and more accurate system of tax allocation and by making Ireland’s (and other countries’) aggressive tax schemes obsolete.
Christian Aid has consistently raised concerns that Ireland’s commitment to tax competition is actually facilitating multinationals to operate aggressive avoidance schemes that reduce their global liabilities and deny much-needed tax revenues to low-income countries.
Opponents of the commission’s proposals, including Ireland, argue that the changes would harm the competitiveness of the tax offering of some European countries.
A competitive European economy is of course important, and countries have the right to ensure that they are competitive in the global economy. They can do so in a variety of ways – investing in education, funding scientific and technological research, and building efficient infrastructure.
However, engaging in tax wars with other countries may offer short-term gains but in the long term serves only to reduce the amount of revenue available to governments to deliver public services.
Those who advocate tax competition present it as a productive and sustainable enterprise, where there are only winners, but these assumptions clearly require more attention. A consistent and integrated approach is required, one which recognises the vital contribution made by corporation taxes to fiscal resources and social equity, and which allows some variation between national tax systems while ensuring common minimum standards to protect the public interest of all.
Published by: The Irish Times, 2 April 2018