EU digital economy tax could cost Ireland €160m, Revenue says

Ireland could lose up to €160 million in tax revenue if EU proposals for taxation of the digital economy are approved, an Oireachtas committee heard on Tuesday.

Speaking at the Oireachtas Finance committee, Kate Levey, an official with the Revenue , suggested the cost of an EU proposed 3 per cent tax on digital services in the country those services occurred could cost Ireland between €120 million and €160 million a year in revenues.

Ms Levey outlined how the Republic would ultimately be a net loser from the taxation measure as, based on Revenue analysis, the tax would only yield around €45 million a year for Ireland.

Ms Levey was suggesting a €45 million yield based on the Revenue estimation of €5 billion across the EU. She cautioned that she hadn’t seen the data surrounding those calculations and the yield figure could actually be lower than that.

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Proposals

In March the European Commission published two proposals concerning taxation on digital activities. The first proposal was a common reform of the EU’s corporate tax rules for digital activities while the second was an interim tax on certain revenues from digital activities. That interim tax of 3 per cent was the main issue discussed at Tuesday’s Oireachtas committee.

Under the commission’s proposals, tax revenues would be collected by EU member states where the users are located, and will only apply to companies with total annual worldwide revenues above €750 million and EU revenues above €50 million

Brendan Crowley, a Department of Finance official, outlined that the rationale for this tax lay in the fact that changing business models mean companies don't necessarily have to have a physical presence in the country they're doing business. Additionally, he said, "historically if you were receiving a service, you paid for it, whereas now people don't make a contribution and their contribution is just watching ads or giving away data".

Ms Levey added that the existing rules requiring a physical presence are regarded as “outdated” by the commission and this proposal “makes a company taxable even where it has no physical presence at all”.

Ireland’s existing corporation tax take is over €8 billion and the concerns surrounding this proposal is that it would diminish those receipts, although Revenue’s forecast on the maximum hit is only 2 per cent of our corporate tax take.

Additionally, Irish concerns are that this is part of a reform process that would see companies pay more in the big EU markets where they have their customer base and less in the Republic in the years to come, at potentially much greater cost to the exchequer. The Government here will also be wary of the possible impact on foreign direct investment here, as the tax advantage of locating in Ireland is eroded.

Profits

The other proposal advanced by the commission in March was a proposal to enable member states to tax profits – as opposed to revenues with the other proposal – generated in their territory, even if a company doesn’t have a physical presence there.

Under that proposal a digital platform will be deemed to have a taxable digital presence if it has more than €7 million in annual revenues in the member state, or has more than 100,000 users in a member state, or has over 3,000 business contracts for digital services.

Ms Levey said the Revenue can’t cost this proposal at the moment because there isn’t sufficient data from the commission on how taxing rights would be reallocated from one jurisdiction to another. In response to questioning she said the measure could have an impact on where companies decide to invest if profit is allocated to bigger member states but said “that’s a speculative question about how attractive Ireland would be from a foreign direct investment perspective”.

Both legislative proposals will be submitted to the European Council for adoption and then to the European Parliament for consultation.