European digital tax as big a threat as Brexit, Ministers fear

On Thursday, the great game took another turn. The European Commission opened its public consultation on its plans to change how internet companies are taxed – plans that the Government regards as a direct threat to Ireland's national interest.

The efforts in Brussels to introduce common rules for taxation have a long history. Ireland has always resisted them, but they've never gone away. But in recent months, as ideas for taxing tech multinationals have taken shape, the plans have moved to a new level of detail and urgency. Dublin is more than worried; people at the very top of Government believe it's as serious as Brexit.

Of course, the commission’s public consultation is largely for show, part of the elaborate choreography of the European legislative process. But it showed where the commission is going – and what Irish officials and Ministers will be dealing with when the proposals are formally tabled early next year.

The commission – which has the responsibility for advancing new laws in Europe – says that a "two-step approach" should be considered. This would involve a quick fix for a few years while a longer-term tax regime is worked out.

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According to the consultation document, among the possibilities for the quick fix are:

- Introducing a European tax on revenues from digital activities;

- Introducing a withholding tax based on payments to non-resident providers of goods and services ordered online;

- Introducing a tax based on the revenue from digital transactions concluded remotely with a non-resident entity that has a significant economic presence (it specifies that this would include revenue from the sale of online advertising);

- Introducing a digital transaction tax that applies early in the value-creation process, such as one on the collection of personal and other data.

Internet giants

Each and every one of these solutions would involve substantial new taxes on the internet giants that have their European headquarters in Ireland.

The commission also proposes five possibilities for a longer-term solution. Some of them have been knocking around for a while, such as introducing rules for a “destination-based corporate tax” – meaning that the tax would be payable where the customer is (ie, not in Ireland). The old proposals of a Common Consolidated Corporate Tax Base – European-wide rules for how and where corporation tax is assessed – make a reappearance. And a new proposal for a “unitary tax” – a tax on a share of the world profit of internet companies which would be attributed to each country on the basis of revenue earned in that country – was mooted.

Ireland loses tax revenues and becomes much less attractive for US multinationals. That means the plans threaten two pillars of Irish economic policy

Irish Government officials come out in hives at this sort of stuff. To them, all of these proposals are versions of the same thing, and present a twin threat: Ireland loses corporation tax revenues and also becomes a much less attractive place for US multinationals. That means the plans threaten the two long-standing pillars of Irish economic policy. Although the issue is not really on the political radar domestically, it would be hard to overstate the alarm in Merrion Street.

When the commission released its consultation proposals, Bloomberg noted it "would eliminate the incentive for multinationals to set their EU headquarters in low-tax states". You don't have to be an expert in international taxation law to figure out who might be the loser out of that.

Dublin has been fighting the commission’s desire for common taxation rules for more than a decade. It has been largely successful. But it has never faced such a determined effort as it now does. Decisions reached over the coming months will have profound implications for the future of Ireland’s corporate tax revenues – and for our economic model in general.

Desperate defence

Privately, both Taoiseach Leo Varadkar and Minister for Finance Paschal Donohoe believe the proposals for common digital taxation in Europe – and the broader integrationist moves of which they are part – represent as great an economic challenge to Ireland as Brexit. Sources intimately familiar with the inner workings of Donohoe's office say he now spends between one-quarter and one-third of his time dealing with this issue. Behind the scenes, there is a desperate defence being mounted.

So what are they doing about it? A central part of the strategy is to cleave to the OECD process known as the “base erosion and profit sharing” (Beps). The OECD – a club of rich nations which shares data and economic policymaking expertise – has been working on plans to combat multinational tax avoidance and will next year publish detailed proposals. The Irish approach is “Beps process good, EU process bad”.

That’s largely because the OECD process involves the US, and therefore is unlikely to squeeze the US tech giants that are so important to Ireland. It’s also, as one official notes, that the OECD process – which involves many more countries – will move much slower.

Ireland's greatest natural ally against the proposals, the UK, is leaving. But the Government is seeking alliances with Baltic, Nordic and other smaller European states

Ireland’s greatest natural ally against the proposals, the UK, is leaving. But the Government is seeking to build alliances with the Baltic states, the Nordics, the countries of central and eastern Europe, the smaller countries for which a revived Franco-German motor for integration, implemented by the commission, is an uneasy prospect.

“The third rail of EU politics is national sovereignty,” says one senior political source involved in the process, citing the US political aphorism about social security. (If you touch the third rail on the New York subway, you die; touch social security in US politics, you die.)

“The most visible aspect of national sovereignty is tax sovereignty. And any discussion on digital taxation runs into that within minutes.”

“Taxation sovereignty is as tangible to them as it is to us,” notes a person involved in the formulation of Ireland’s plans for reaching out to new allies.

Playing field

At last week’s European summit in Brussels, the Taoiseach attended for the first time a meeting of the Nordic group of countries, whose leaders gather in advance of the summit proper. There is also a group of Nordic finance ministers, and Donohoe will attend their next meeting on Monday week in Brussels. Irish officials in Brussels and around Europe have been plugging away on this stuff for a long time. And they’re good at this stuff. Proposed conclusions from last week’s European summit that noted the need for a “level playing field”, were amended to refer to a “global level playing field” after pressure from Ireland. “Global means OECD,” explained one official, with some satisfaction.

Ultimately. Ireland has a veto. But those who know how EU politics works say that blocking something that everyone else wants to do is not really feasible over the long term. Especially when Ireland may be looking for special deals and concessions on Brexit. Better to try to shape the process than to stand back and say, “No way.”

All companies try to minimise their tax bill, but multinational technology companies have created a Byzantine network of offshore tax arrangements

And, on another level, there is an inevitability that the tech giants will have to pay more tax in the future.

The growth of technology and internet companies has been spectacular. In 2006, one of the world’s 20 biggest companies was a tech company; now nine of them are. Equally spectacular has been their success at tax avoidance.

All companies try to minimise their tax bill, but multinational technology companies have created a Byzantine network of offshore tax arrangements, transferring intellectual property rights and licences around the globe to produce artificially taxable profits that are tiny compared to their actual trading profits. A tech giant might generate many billions in profits but pay only a few hundred million in taxes. But it might (and some do) pay them in Ireland. And a few hundred million euro is a lot of money to Paschal Donohoe.

Hovering Apple

At every European discussion, Ireland's relations with Apple hovers in the background. And sometimes in the foreground.

"I am not naive," the Belgian prime minister Louis Michel told journalists at the recent Digital summit of EU leaders in Tallinn, Estonia, where the item was again on the agenda. "I know that some European nations are reticent. Because, now, within a short timeframe, it profits them, but it is a short-term vision.

“I call for a balanced and just level of taxation for everyone. An SME here pays taxes. It seems only correct that very large internet companies contribute at a European level.”

The subject will come up again at the December summit. And the one after that. “It’ll be a long fight,” grimaces one senior figure in Dublin. And it’s on now.