New proposals for harmonised tax treatment of digital companies will be debated this weekend by European Union finance ministers in the Estonian capital, Tallinn.
The measures pose the usual challenge to the Republic of Ireland and its model of low corporate tax. Irish officials emphasise that all tax legislation has to be agreed by unanimity but say they are engaged constructively with the Organisation for Economic Co-operation and Development's ongoing work on tax-base erosion and profit-sharing. They say they accept the fundamental principle that tax should be levied on companies in the countries where value is added rather than in the countries where they are notionally headquartered.
Corporate-tax harmonisation and its twin sister, a consolidated approach to corporate-tax bases, are hardy annuals for the finance ministers, strongly advocated by the European Commission and some member states, led by France.
Tax-base proposals
The latter proposals are part of commission initiatives, launched last year, that are wending their way through the legislative process. Ireland remains particularly concerned about the “consolidated” aspect of the tax-base proposals.
A discussion specifically of digital-company taxation – and an EU input to the ongoing OECD discussion of the issue – had been scheduled for the informal Ecofin meeting by the Estonian EU presidency. France's president, Emmanuel Macron, has now also persuaded Germany, Italy and Spain to sign up to an initiative advocating a shift from taxation of profits to that of turnover.
A joint letter states: “We should no longer accept that these companies do business in Europe while paying minimal amounts of tax to our treasuries. Economic efficiency is at stake, as well as tax fairness and sovereignty.”
The OECD estimates that between $100 billion and $240 billion, or between €80 billion and €200 billion, of revenue is lost each year because of the gaps in international rules that allow corporate profits to be artificially shifted to tax havens.
In the digital economy, the four argue, an “equalisation tax” could recoup at least some of the tax the giant digital companies have not being paying and is a cause of public scandal across the European Union.
Distorted market
The Estonian paper to the Ecofin ministers accepts the urgency of the challenge posed by member states’ inability to levy tax on multinational digital companies: “It needs to be highlighted that the scale of the described market distortion is growing rapidly since the share of digital economy in the global economy is expected to grow exponentially.
"This trend of growth is already clearly visible when we take a look at companies with the highest market value in the world. Ten years ago, they were ExxonMobil, General Electric, Microsoft, Citigroup, AT&T, Bank of America and now they are Apple, Alphabet, Microsoft, Amazon, Berkshire Hathaway and Facebook.
“It cannot be argued anymore that the deficiency of international tax rules is a minor gap affecting only a limited number of companies. This deficiency has unintentionally turned into an unequal competitive advantage for the most successful and rapidly growing businesses.”
But although superficially appealing, particularly to large countries, the idea of taxing turnover is problematic.
The commission, which welcomed the initiative but is not taking a formal position yet, is concerned about treating one sector of industry differently from the rest, which could breach EU state-aid and competition rules.
And how do you define the digital industry: by company, by activity? And could you reconcile taxing turnover – capable of generating significant revenue even if levied at a low level – with a consolidated approach to corporate-tax bases and with general corporate taxation? Issues of double taxation would certainly arise.
Plugging gaps
“The most promising way forward,” the Estonians argue, “would be to amend the current international corporate tax rules to fill in the gap that enables the profits earned from businesses in the digitalised economy to escape fair taxation. This approach – amending existing rules rather than reinventing the wheel – has been widely used on the global and EU levels for tackling other shortcomings of international tax rules.”
It is a view with which Minister for Finance Paschal Donohoe is likely to agree this weekend in the Ecofin discussion, which will not anyway produce a formal decision or probably even a broad consensus.
The OECD, meanwhile, is expected to report early next year on its view of digital taxation. With or without input from Ecofin.
