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
In relation to corporation tax, it is possible the Beps project could result in more profits being taxed in Ireland, rather than, as is the case with so much multinational turnover these days, Ireland just being a staging post for income that is on its way to Bermuda or the Cayman Islands, where many companies have located their IP.
Likewise, the new rules could make the substantial activities that multinationals have in Ireland even more important to their global structures, as the world’s governments seem determined to create a greater alignment between substantial economic activity, and tax.
On the other hand, should the project result in more profit being subjected to tax in larger markets such as Italy, Germany and France, this would weaken the attractiveness of Ireland’s 12.5 per cent corporation tax.
Vat is becoming an interesting aspect of the Beps debate. Robert Stack of the US Treasury said on Wednesday that consideration of the difficulties associated with changing the rules on how you tax profits, had fed into the idea that large market countries could compensate in part, at least, by way of Vat or a sales tax. In this way they would get valuable revenues from the turnovers flowing through digital multinationals.
The suggestion involves a company agreeing to collect and hand over taxes to a jurisdiction in which under the law it does not have a taxable presence. John Lundberg, a senior tax director and attorney with Microsoft, said his company supported this idea. Gary Sprague, of the Palo Alto-based Digital Economy Group, said the idea of companies having an “extraterritorial obligation” towards a country in which it had no legal presence was “a big step”, but they were nevertheless willing to go along with it.
Compliance is an obvious issue with the idea, given that companies selling products over the internet could be a continent away from the jurisdiction for which they are supposed to collect and deliver tax.
However, the concept is already being introduced in the EU and there are obvious difficulties involved for larger companies in terms of not playing ball.
A number of speakers said that while Vat or a sales tax is on the face of it a tax on consumers, business realities mean that the companies selling the products take a hit on their margins. This means the company is funding part of the Vat bill, Sprague said. Another speaker, Stephen Dale, of Landwell & Associes, said it is in essence a tax on profits.
Ireland is expecting to gain significant revenue from the EU changes to Vat rules due in 2015 which will see digital companies collecting and paying over the tax to Ireland on sales made over the internet to Irish customers.
Peter Vale, tax partner with Grant Thornton, Dublin, who attended the Paris meeting, described as “slightly alarming” the pace at which the Beps project is moving and said changes to the rules that would eliminate some of Ireland’s tax advantages could have significant negative consequences for employment here. On the other hand, the focus on linking taxation to real economic substance could incentivise multinationals to either create or augment their Irish employment, he said.