Net closing on tax affairs of multinationals

Governments across the world are annoyed by the sight of multinationals doing business within their economies yet paying little or no tax there.

The size of the revenues going through the books of these companies, and the fact that these revenues "then go and get taxed in low tax countries" makes governments even more annoyed, says Robert Stack, who co-chaired a meeting on the issue at the Paris headquarters of the Organisation for Economic Cooperation and Development (OECD) this week.

Stack is a deputy assistant secretary for international tax affairs with the US Treasury Department in Washington DC. Last year, he told a conference there that the days of "double non-taxation" were over for multinational companies. He rebutted suggestions that the Treasury was not fully behind the Base Erosion and Profit Shifting (Beps) project being run by the OECD.

Stack is co-chairing an OECD Beps task force that is examining the challenges created by the digital economy for the world's tax authorities, an issue that is of great interest to the Irish economy given the role it plays in the tax affairs of Microsoft, Apple, Facebook and others.

The other chair of the digital task force is Edouard Marcus, director of European and International Affairs with the French Ministry of Finance. On Wednesday, the two men co-chaired a "public discussion" meeting in the OECD headquarters in Paris.

The task force is one of a number working on 15 "action plans" the OECD drafted in the wake of a request from the G20 group of major economic powers that it examine the issue of whether the world's tax rules are still fit for purpose.

The task forces are looking at issues such as transfer pricing, the use of inter-company loans, and the role of intellectual property in modern business, as part of a suite of measures the OECD will present to the G20 for possible implementation to make it harder for multinationals to game the global tax rules in ways that were never intended.

The decision to look at the tax challenges of the digital economy led to the production of a draft report in March. It was not a consensus report but there was a lot of encouragement on Wednesday for the apparently developing view reflected in the report that it is not possible to ring-fence the digital economy and create special rules for it.

The 34 members (including Ireland) of the OECD as well as the larger accountancy firms, multinationals such as Danone, IBM, Google, Microsoft and Ebay, business representation groups, a body representing non-government organisations, a body representing the trade union movement, and a number of individuals, took part in Wednesday's meeting.

A number of early speakers representing the business community spoke about the impossibility of introducing special measures for the digital economy, but the representatives of the Italian, Indian and French revenue and finance authorities pointed out that the group's mandate was to examine whether the existing rules allow for fair taxation. As Vinay Singh, from the Indian Ministry of Finance put it: "Are there [business] models out there that make the existing rules null and void?"

'Significant presence'
Stack suggested that while it may not be possible to write new rules for a sector that is hard to define, it might be possible to identify characteristics of the digital economy that could be subjected to new rules.

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.

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.