French move on digital tax ups the ante

Cantillon: Will Paris’s application of 3% tax on tech giants damage Ireland’s revenue?

 Facebook HQ in Dublin: Trade tensions between Europe and the US may increase with French tax initiative. Photograph: Cyril Byrne

Facebook HQ in Dublin: Trade tensions between Europe and the US may increase with French tax initiative. Photograph: Cyril Byrne

 

France’s decision to strike out unilaterally and press ahead with plans for a 3 per cent digital tax on Facebook, Google and other US technology giants has set the cat among the pigeons. The move was followed by pledges from the UK and indications from Spain and Austria that they will soon follow suit, potentially creating enough momentum to sway the bloc. This could leave Ireland, which has favoured a global approach inclusive of the US, isolated. So what, you might ask?

Well, it could heighten trade tensions between Europe and the US. The US has threatened to respond with sanctions if France or the UK presses the button on this tax, which would fall on the revenues companies earn from providing digital services.

UK-US relations

With UK-US relations already strained over leaked cables from the UK’s ambassador in Washington, pressure is mounting and Trump’s weapon of choice in his dealings with so much of the world is trade sanctions.

A digital tax could also, in theory, dampen the flow of foreign direct investment from the US into Europe. But the market may be too big and lucrative for tech firms to snub.

Joe Tynan, the head of tax sat PwC Ireland, said a tax on sales in big markets could see companies cut the profits they declare for tax in the Republic, effectively cutting the Government’s corporate tax take.

Foreign direct investment

“Foreign direct investment tends to be a choice between locations. The UK is a big competitor for FDI. Introducing a digital tax is unlikely to improve their position,” Mr Tynan said.

“If it becomes widespread, it could make the EU less attractive but I don’t think it would have a significant impact as it will still be an important market,” he added.

On the likely impact on companies here, Mr Tynan said: “If it operates across Europe, it will reduce the corporate tax take in Ireland, if everything else stays the same”.

In terms of our corporate tax purse, the impact doesn’t appear to be that threatening. Initial Revenue estimates indicated the EU-wide proposal could cost the exchequer €160 million a year, due to the large number of multinational tech firms who have their European headquarters in Dublin.

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