EU digital tax could be opposed on legal grounds, warns tax group

Irish Tax Institute also raises concern measure could be used to harmonise taxation

A European Commission proposal to tax the digital turnover of big tech firms could be challenged legally if it gets across the line, the Irish Tax Institute (ITI) has warned.

The institute’s tax policy director, Cora O’Brien, said legal challenges could be brought against the measure on several grounds, including that it is discriminatory by singling out digital companies.

It could also be opposed on the grounds of proportionality or whether such a turnover tax is compatible with existing EU law, Ms O'Brien told the Oireachtas finance committee on Thursday.

In response to the outcry over multinational tax avoidance and the suggestion that companies are exploiting outmoded systems to shift profits to low-tax countries, the commission wants to impose a 3 per cent levy on the digital revenues of large corporations such as Google, Facebook and Amazon

However, the ITI said such a unilateral move by the EU could create protracted global tax disputes and potentially damage the bloc’s competitiveness.

“ EU companies could be adversely impacted if other non-EU countries apply similar levies in response, impacting the EU’s competitiveness,” Ms O’Brien said.

She also raised concern the measure might be used as a bridge to harmonising corporate taxation across the bloc, a move that is seen as a threat to the Republic’s coveted 12.5 per cent corporation tax rate.

Not evolved

The institute acknowledged there was now an acceptance that the established corporate tax framework, which taxes profits based on where value has been created, had not evolved to match the digitalisation of global businesses.

"The effectiveness of existing global tax rules is challenged by the ongoing digitalisation of the economy," the ITI communications director Olivia Buckley said.

“While we accept that the challenges of taxing the digital economy must be addressed we believe that when it comes to international corporate tax, a global rules-based system based on international agreement is critical,” she said.

“What the EU is proposing is a unilateral measure to something that needs a global response. It is important to have the same rule book for all countries,” she added.

Ministers from smaller EU nations, including Ireland, Luxembourg and Malta, opposed the plan at an EU ministerial meeting in the Bulgarian capital, Sofia, last month also arguing that an overhaul of digital taxation should be done at a global level and with a long-term solution.

Taxable presence

Also attending the Oireachtas committee was Sorley McCaughey, head of advocacy at Christian Aid, who said the EU's digital economy proposals were too focused on one part of that economy, namely the provision of digital services in a country such as online advertising, software or access to online content, without having a taxable presence in that country.

“They will not deal [and are not intended to deal] with a much more pervasive area of activity: the way that online or digitally-facilitated sales mean that non-digital goods and services can be sold in a particular country, and the sales booked in a low-tax jurisdiction,” he said.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times