The move by France to push ahead with its digital services tax underlines the dangers for Ireland in the international drive for corporate tax reform. Some of this is about how much tax big companies pay – and a lot of it is about where they pay it. And as a country central to the operations and tax planning of many of the major players, Ireland is very much in the spotlight here.
A drive for international corporate tax reform has been underway now in earnest for more than five years, under a process led by the Organisation for Economic Co-Operation and Development (OECD). Ironically, Ireland, despite being in the firing line on the subject, has gained hugely from the first round of reform under this process, with receipts doubling over the last four years alone to an estimated €12.5 billion this year. The increase has been due in part to international restructuring by the companies involved, in response to rule changes following a 2015 OECD report on the so-called BEPS (Base Erosion and Profit Shifting) process.
However, the second phase of the process is likely to lead to a fall in corporate tax revenues here compared to what they would otherwise be. Whether revenues might actually fall is not clear, but they might, and the reform plans could also have a big impact on our drive to attract investment here. Nonetheless, the Irish Government supports the BEPS process, because it fears the alternative is worse.
The French action puts this alternative into focus. It involves unilateral moves by major countries leading not only to an impact on Irish tax revenues, but also trade wars. The US is likely to impose tariffs on selected French products in response to the digital sales tax move, arguing that US companies are being unfairly targeted. It is not hard to see how Irish exports to the US could be caught up in this as well.
The Trump administration is likely to push ahead with the tariff plan, and while president-elect Biden may take a lower-key approach, he is also thought likely to defend US interests. Ireland favours a negotiated approach via the OECD, feeling this offers less threat in what may be a game of damage limitation.
The French move highlights one of the key arguments in the tax reform debate. Should US companies pay some tax where they sell their products, rather than moving profits earned across Europe to lower tax countries like Ireland where they typically have their European or international headquarters? By sending the firms tax bills on the base of its own digital services tax, France is upping the ante ahead of OECD talks, due to conclude in the middle of next year, which are looking at the topics.
France wants an EU-wide response prepared in the interim, in case the OECD talks fail – this also carries dangers for Ireland if it signals a revival of earlier EU corporation tax harmonisation plans.
If one of the companies involved, say Facebook, pays tax in France on the basis of sales there – which is a new way to collect corporate tax – then it would have less profits and thus pay less tax in Ireland.
The OECD talks are also looking at the concept of a minimum tax rate for multinational corporations. What this rate might be and how it would work is of vital national interest to Ireland, which has long used the 12.5 per cent rate to attract firms here.
The corporate tax debate has been framed in the context of revelations about the extraordinary low tax bills paid by many US companies on their international profits. All the signs are that they will pay more in future. But how much is the question. And hidden behind all this is also a brewing international battle on which exchequers will benefit.