Net closing on tax affairs of multinationals

An OECD meeting this week reflected the developing view that the digital economy can’t be ringfenced for tax purposes

Fri, Apr 25, 2014, 01:10

There was much discussion on whether the rules that determine whether a company has a “permanent establishment” in a jurisdiction need to be changed or whether the new concept of a “significant presence” should be introduced to deal with the challenges created by digitalised business. As matters stand, a company needs to have a permanent establishment in a country before it becomes subject to corporation tax on the profits from the associated sales.

This issue has arisen in public debate in the UK and elsewhere, where companies such as Google and Amazon can be seen to have substantial operations that nevertheless do not cause the profits from the sales with which they are associated, to become taxable under the permanent establishment rules. In the case of Google, the taxable presence is deemed to be in Ireland.

However, Stack said that the deliberations of the committee had led it to consider a number of problems with the changing of the permanent establishment rules. If there is an increased number of “PEs” in the world, and there are no clear rules about how to allocate the deductions they would be allowed to make against profit calculations, this could cause very substantial problems.

Krister Andersson, head of tax policy with Business Europe, argued against trying to shift more taxable profits towards the markets companies sold into, as against where they sold from, saying this would see the tax of small, export-orientated economies shifting towards the larger economies. He also said that any such shift could be against the interests of large economies, such as Germany, that ran a trade surplus.


Massive turnovers
The discussion will feed into the final few meetings of the digital economy group, prior to their drafting a final report. A consensus seemed to be emerging that governments should wait to see how the more general Beps measures about to be proposed, impact on the taxation of the digital sector, rather than tackling the so-called digital economy as a separate issue.

As noted by Stack, a lot of the drive behind the project is governments’ annoyance at large technology companies having massive turnovers and the governments “not getting a piece of it.”

Will Morris, chairman of the tax committee of Biac, which represents the views of business to the OECD, and who is a director of global tax policy with GE International, said it would be a good idea to wait to see if other Beps measures addressed the perception that “the digital economy appears to be escaping tax”.

He said there was a genuine political problem with the issue and “to imagine we can ignore the politics of it” could lead to the issue being addressed with policies that were not satisfactory. He suggested that after the measures introduced as a result of the Beps project, it would be a good idea to return and see if the particular challenges raised by the digital economy had been successfully dealt with.

OECD fallout for Ireland Project could threaten corporation tax, Vat and jobs
Given Ireland’s reliance on foreign direct investment (FDI) and the extraordinarily large role it plays in the tax structures of some of the world’s biggest digital economy companies, it has a particular interest in the OECD’s Beps project.

Any changes that emerge from the project could affect Ireland’s collection of both corporation tax and Vat, and overall the project could affect Ireland’s ability to keep the jobs that accompany the high level of FDI it secures.

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