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Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach díospóireacht -
Thursday, 3 May 2018

EU Proposals on Taxation of the Digital Economy: Discussion (Resumed)

Our next business is engagement on EU proposals COM (2018) 147 and COM (2018) 148 on taxation of the digital economy. We are joined by representatives of the Irish Tax Institute and Christian Aid Ireland. I welcome from the Irish Tax Institute Ms Cora O'Brien and from Christian Aid Ireland Mr. Sorley McCaughey and their colleagues, who will assist us in our deliberations on the matter.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

There will be a number of opening statements. I invite Ms O'Brien to make hers.

Ms Cora O'Brien

With the Chair's permission, my colleagues and I will give the opening address.

Ms Olivia Buckley

The breadth and pace of digitalisation is such that the world’s largest bodies, including the Organisation for Economic Co-operation and Development, OECD, the European Union, EU, the International Monetary Fund, IMF, and the World Economic Forum, are dedicated to understanding its impact and implications for policymakers. The World Economic Forum has said that "Digitalization is one of the most fundamental drivers of transformation ever". The OECD has acknowledged that it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes because of the increasingly pervasive nature of digitalisation. It considers digitalisation as a transformative process affecting all sectors that is brought about by advances in information and communications technology, ICT. The IMF has also stated that the digital economy is sometimes defined narrowly. However, in a broad sense, all activities that use digitalised data are part of the digital economy. In modern economies, that is the entire economy.

The tax implications of digitalisation and the change and complexity that is brought about by that has been intensively worked on by the OECD and the EU. The OECD says that, in the context of tax matters, this means that policy development and implementation must be designed to allow for the changing environment, while being sufficiently clear to provide the certainty and clarity that facilitates sustainable, long-term growth. The European Union has also put forward policy proposals, both of a short and long-term nature, to which we will refer later.

There is an appreciation that much work has been done through base erosion and profit shifting, BEPS, to reform outdated global tax rules. The OECD says that it is already starting to see companies realign their business models to be BEPS-compliant and that this is having an impact on where they pay tax. However, there is universal acceptance that the corporate tax framework, which taxes profits based on where value has been created, has not evolved to match the digitalisation of global businesses, as our senior tax policy manager, Ms Anne Gunnell, will now explain.

Ms Anne Gunnell

The global tax rules are strongly rooted in a physical presence that is largely determined by the permanent establishment rules. The effectiveness of existing global tax rules is challenged by the ongoing digitalisation of the economy to the extent that value creation is becoming less dependent on the physical presence of people or property. One of the key challenges is that the permanent establishment test does not reflect modern business models. Policymakers are working on the challenges and examining such issues as the collection and exploitation of data, network effects and the emergence of new business models as exacerbating the challenges to existing tax rules. New rules dealing with the taxation of modern business models will also have to address how profits are allocated, that is, how the share of multinational profits should be taxed in a given country.

The work of the OECD on the taxation of the digital economy is continuing as outlined in its interim report, Tax Challenges Arising from Digitalisation, published in March this year. It has resumed this work, including the monitoring of developments in digital technology and business models, the individual measures taken by countries to address the broader tax challenges raised by digitalisation and the extent of implementation and impact of the relevant actions from the BEPS package. In fact, Mr. David Bradbury, head of the OECD’s tax policy and statistics division, has said that everyone within the inclusive framework, which is 113 countries, has agreed that we should continue to work towards a global consensus-based solution. That is the ultimate answer and unless we achieve that, it is likely that there will be a range of adverse economic consequences that will flow from unilateral measures. The best way forward is for us to move together.

In March, the European Commission also came forward with two legislative proposals to deal with challenges in taxing the digital economy, an interim and a long-term measure. In the short term, the EU proposes a digital services tax. This measure is targeted at larger digital companies that generate revenue by supplying digital services within the EU. The tax will be imposed at 3% of gross revenue, taking no account of a business's profitability or margin. Hence, a highly profitable company would get taxed at the same level as a loss-making company. The tax is focused on a small number of companies with global annual turnover exceeding €750 million. The charge is not creditable against other corporation tax paid and will therefore lead to some double taxation.

The EU also proposes a long-term comprehensive solution based on a new significant digital presence. The comprehensive solution will apply to a much wider range of companies. This comprehensive solution is expected to form part of the EU’s ambitions for a common consolidated corporate tax base, CCCTB. Our tax policy director, Ms Cora O'Brien, will now critique the proposals and examine the EU and global reaction to them.

Ms Cora O'Brien

The Irish Tax Institute has a number of concerns about the proposals. The EU would be moving unilaterally, rather than in co-ordination with the rest of the world, which could create protracted tax disputes, both among countries and between countries and companies. EU companies could be adversely impacted if other non-EU countries apply similar levies in response, thereby impacting the EU’s competitiveness. Any measure that is a bridge to CCCTB creates concern about the loss of tax sovereignty. Temporary taxes that deliver funds for certain countries could be hard to remove, disruptive and become a permanent levy on doing business in the EU. Legal challenges could be brought against the proposals under several headings: on the grounds of discrimination for having a special tax regime only for digital companies; on the grounds of proportionality; and on the grounds that this is another turnover tax and therefore incompatible with EU law.

Any new framework for taxation in a digital environment should not create double taxation for companies. However, double taxation will arise with a short-term levy that is not creditable. The EU approach is likely to trigger the need for EU countries to renegotiate their treaties with third countries. The interim measure will continue to apply with third countries in circumstances where the tax treaty has not been updated to reflect the new rules for the significant digital presence, the proposed long-term solution. Third countries such as the US and China may not agree to renegotiate a new treaty that could potentially lead to a shift in tax base to another country and in this way the levy can become permanent.

There has been no impact assessment by the EU of the proposals for individual member states such as Ireland. One of the most important policy principles of a new tax is that it is easily administrable. A 3% annual pan-EU levy raises a number of challenges for tax administrations. Reports from the recent informal meeting of the Economic and Financial Affairs Council, ECOFIN, indicate growing concerns and opposition to the EU interim measure, with preferences being strongly expressed for a long-term, global solution. Concerns are emerging from both small and larger EU member states. Ángel Gurría, Secretary General of the OECD, who attended the ECOFIN meeting, said work for global reform, which would include the United States, Japan and China, was already under way and cautioned against adopting measures that could be inconsistent with a long-term solution. Mr. Gurría, when he spoke about the project in Dublin in March of this year, stressed that we are not talking about a company or a few companies. We are talking about how one taxes an increasingly digitalised economy in the world. Reports from the Asia-Europe Finance Ministers' meeting last week highlight that China, the world’s second largest economy, with 19% of the world’s population, also supports a global approach to digital tax and opposes the EU interim measure.

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 system founded upon international agreement is critical. What the EU is proposing is a unilateral, regional measure in respect of something that requires a global response. It is important to have the same rulebook for all countries. Global tax policy must be principles-based. It must be durable and adaptable to the constantly changing nature of the digital economy. Measures introduced today could be quickly superseded by further digital evolution. This is a very complex undertaking and it requires a global solution.

I thank the witnesses and call on Mr. McCaughey to make his opening statement.

Mr. Sorley McCaughey

Good morning. I am the head of advocacy and policy at Christian Aid Ireland. I am here with Mr. Mike Lewis, who has been working with us recently on a consultancy basis and was the principle author of the Christian Aid report on the impact of Ireland’s tax policy on developing countries, entitled Not Without Cost, which I think the members all have a copy of. We have been working on the issue of tax justice since 2007, when we became the first development NGO to identify tax as a development issue and as a justice issue. As such, we are principally concerned with the erosion of the tax base in the world’s poorest countries. It is estimated by the IMF that developing countries lose up to $150 billion per year to multinational tax avoidance.

We appreciate the opportunity to appear before the committee. I thank the Chair and members for the invitation. The countries where we work and where Irish aid is spent are not only among the world’s most rapidly growing markets for digital services due to their lower levels of penetration compared to Europe and North America, but they are also now the primary target markets for Facebook, Google and other similar companies. Indeed, in many developing countries, social media companies such as Facebook have the ambition to "be" the Internet. Therefore, to the extent that all economic activities increasingly incorporate online activities, what we do now to tax digital economic activities may safeguard or undermine developing countries’ tax bases long into the future.

As a result, we welcome the ambition of the EU and other entities to explore new solutions for taxing digital economic activity. However, our research, including the papers we published last November on the global impact of Ireland’s tax system, suggests that the problems of taxing digital activities in developing countries are wider than the dysfunctions the new EU proposals are designed to address. The evidence we present today argues that the EU proposals, both interim and final, can only be part of the solution. We want to talk briefly about possible limits to their technical scope, practical efficacy and international impact. We end by suggesting that there are wider proposals being developed elsewhere, including in the EU but also in the OECD and at the UN, which would provide some more systemic solutions.

On the technical scope, the EU's digital economy proposals are effectively focused on only one part of that economy, namely, providing digital services such as online advertising, software or access to online content in a country without having a taxable presence in that country. They will not deal with a much more pervasive area of activity, which is 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. The first problem is really a subset of the second. As our report, Impossible Structures, showed, whether one is selling subscriptions to the LinkedIn website or physical Microsoft mobile phones designed for developing countries, in a digitised economy one can sell both through a booking centre in a low-tax jurisdiction without the need for a taxable bricks-and-mortar presence in the country where one's customers are based. Both online services and sales of physical goods can use the famous double Irish and single malt structures that we highlighted to shift profits and avoid having a taxable bricks-and-mortar permanent establishment in the country where the users or customers are based. The EU proposal therefore introduces a narrow solution for taxing profits from sales of digital services when other goods and services can use many of the same mechanisms to avoid tax and will not be covered by the Commission’s proposals. Indeed the proposals explicitly state that “the mere sale of goods or services facilitated by using the internet or an electronic network is not regarded as a [taxable] digital service.”

Looking at the practical efficacy of the proposals, our November report highlighted how many of the structures used to avoid a taxable presence, a permanent establishment where goods and services are sold - which is really the overarching problem we are talking about here - rely upon the standard terms of double tax treaties governing what constitutes a taxable permanent establishment and how profits should be attributed to it. The Commission’s proposals explicitly acknowledge that they cannot apply in situations where sales are being booked in a jurisdiction which has a double tax treaty with the country where the users or customers are present. Most of the jurisdictions we are talking about, including Ireland, Luxembourg and others, enjoy wide treaty networks, certainly with all other EU member states and, increasingly, with developing countries. In other words, even if developing countries were to adopt the kinds of solutions described in the EU proposals, they would also come up against this problem.

Finally, on the international impact, the obstacle of double tax treaties highlights the fact that even were the EU proposals to be adopted, and adopted more widely than in the EU, they would come up against dysfunctions of wider international tax standards. These are being looked at by several different entities including the UN tax committee, international bodies such as the Independent Commission for the Reform of International Corporate Taxation, ICRICT, and, of course, the OECD. Although the OECD excludes most developing countries from any real decision-making, it has nonetheless produced proposals that include useful measures with a fairly wide degree of support from some of the key jurisdictions currently used by Facebook, Google and many others to avoid a taxable sales presence around the world. We believe, therefore, that the wider problem we have described, that is, the avoidance of a taxable presence when making sales of both digital and non-digital goods and services, will ultimately be tackled by fundamental root-and-branch change such as unitary taxation systems, if properly designed.

We also believe, however, that there are aspects of the OECD’s BEPS package that might help with this wider problem in the meantime. For developing countries, it is of concern that a global booking centre like Ireland, despite its vocal support for the OECD as the forum for international tax reform, is still not signed up to implement this package in full. It is particularly relevant to the problems we are talking about today that Ireland is still reserving its position on Article 12 of the OECD multilateral instrument, which is designed to tackle precisely the avoidance of a taxable presence we have been describing. Furthermore, Ireland’s transfer pricing rules, which determine how profits are to be shared between centres of intangible assets or sales booking centres such as Ireland and places where sales are actually made, are still based on the OECD’s 2010 version and have not been amended to take account of the latest OECD recommendations. Neither of these things is a panacea but both are within Ireland’s powers to do right now. They are consonant with this Government’s commitments and stated preference to implement the OECD’s recommendations and would go some way towards tackling the kinds of wider permanent establishment avoidance problems with which the EU’s digital economy proposals will not and cannot deal.

I thank the witnesses for their presentations. I want to ask about the global approach. The witnesses have continually said that we need a global approach rather than taking up the EU approach. We put this to officials from the Department earlier in the week and suggested that it is kind of a handy excuse for the Government. The OECD's interim report in March showed just exactly how slow progress is. Do the witnesses think there is a tactical element to Ireland's call for a more global approach and that it is made in the full knowledge that a global action means no action at all any time soon?

Ms Cora O'Brien

There are a few issues there. There is a lot of agreement between what we are saying on the global approach. Later, I can talk about some of the details of the BEPS issues which Mr. McCaughey raised if the Senator wishes. However, as an overall principle, the BEPS approach worked very well as a global initiative agreed at a global level and then implemented regionally. With a speed unheard of, the EU took the globally agreed measures of the BEPS project, converted them into an EU directive and within six months that directive was adopted. We are all now in the process of implementing it. The reason it was possible to progress the particular EU directives which came out of BEPS quickly was that all the member states had agreed, in principle, to the measures at the OECD. It enabled the thing to be fast-tracked.

We think that a similar process is the way to go here. Rather than having two parallel regimes and having one being brought in by the EU through these short-term and long-term measures that may have to be superseded by or run alongside another regime agreed globally, it is better to go with a global approach in the first instance. At the weekend, we saw that an urgency is felt at the OECD about getting this done quickly. The interim report was brought forward from 2019 to 2018. There was talk at the weekend about getting an agreement in 2019 rather than 2020. On the one hand, the OECD process is speeding up as a result of the urgency and, on the other, it is not actually very far behind the EU proposals in any event because the effective date for both is 1 January 2020. We could end up with EU measures that might create many problems and be very difficult to unwind for the sake of not having to wait a short time to get global agreement on an overall approach.

I thank Ms O'Brien for that. Mr. McCaughey suggests that, even if implemented, the EU plans would come up against the dysfunctions of a wider tax system. Will he speak to his main concerns in that regard?

Mr. Sorley McCaughey

If the Senator does not mind, I will let Mr. Lewis take that question.

Mr. Mike Lewis

There are two things to say about this. First, if I may return to something Ms O'Brien said, it is no secret that there is serious dissensus within the OECD and within the inclusive framework on this area of tax policy-making.

That dissensus is readable in the interim report the OECD produced in late March. I do not believe we should be optimistic that the OECD will necessarily be the body that will rapidly bring out very ambitious proposals in this area. We should not overestimate the extent to which the OECD is an inclusive forum. We can talk about how the decisions are made there at length, if the Senator wishes.

One of the reasons for that dissensus, as Ms O'Brien said, is that there are members of the inclusive framework who would wish to confine the OECD's consideration in this area to a smaller number of highly digitised companies and economic activities and they would wish to use this opportunity to think in more fundamental terms about dysfunctions of the global tax system, in particular problems of nexus and the allocation of profits, which are essentially the two overarching issues with which the OECD's recent report on the challenges of digitalisation deals. Our argument would be that if we are going to use the OECD as effectively the global forum where these questions should be considered, we would hope all members of the inclusive framework, including Ireland, would allow that body to think in deeper and more ambitious terms about some of the areas of nexus and allocation of profits that were not dealt with in the original base erosion and profit shifting, BEPS, package, rather than trying to get a quick set of proposals that would deal with a narrow set of highly digitised economic activities. That is the risk with this accelerated timeline at the OECD.

It is all very well to wait for a global agreement in this area but it ignores the reality that major economies outside the European Union are already taking unilateral action in this area, for example, with measures such as the significant economic presence proposals both within legislation and case law in India and the way China has approached a broader definition of technical services, for example, to encompass some of the digital services we are discussing. The cat is already out of the bag in terms of global harmonisation. That is exactly why, if we are going to do this at the OECD, whatever the OECD comes up with will have to satisfy those kinds of economies too and that is why it needs to be ambitious.

We have heard a good deal about tax digitisation. Is it little more than shifting tax from one member state to another and does Ireland stand to be a loser in all of that? That is a question for Ms O'Brien and Mr. Lewis.

Ms Cora O'Brien

On the EU proposals, there is a risk of a shift of tax in terms of the cost of the short-term measure. The Senator would have heard some detail from Revenue and Department of Finance officials on the issue of having to deduct the tax from the corporate base here and some of the costs that would involve. That is the short-term solution and there is a cost attached to that. With the longer-term solution and the significant digital presence, the way that is being set out in the proposal in terms of the way profits are being allocated to this new significant digital presence is effectively an allocation method. We do not know the detail of what the allocation factors will be but it is possible they will be, for example, with respect to users in order that countries with larger populations will get a larger allocation. In that way, it is likely there would be a shift of the taxable base.

Ireland would be a loser in all of that.

Ms Cora O'Brien

Yes, in that we are not a large country. If the allocation is made on a population-heavy basis, yes.

Will Mr. Lewis also comment on that?

Mr. Mike Lewis

I would echo much of what Ms O'Brien said. The direct impact of the EU proposals will depend upon whether the turnover tax is tax creditable in other jurisdictions, the interim proposal and the allocation methods used in the final proposal. That will determine whether those specific measures lead to a net tax revenue gain or loss for Ireland.

In terms of the larger element about where Ireland sits in these kinds of digital companies' tax structures, and what effect wider reforms would have on Ireland's tax base, on the one hand, as we have said, there is a significant presence of a number of these companies in Ireland and they conduct activities here that we would say undermine the tax bases of some other countries. The way many of these structures work, as we show in our report, is that there is an effort also to shift profits out of Ireland into even lower tax jurisdictions. It is the reason, for example, Ireland runs such an enormous deficit in royalty payments. It is not clear-cut to say this is an area of economic activity where, if more regulation was introduced, Ireland would lose out because its position in these structures is much more polyvalent.

On the sovereignty issue, the departmental officials cited legal questions they have on the legal basis for it. We gather their particular concern is around the fact that it would be the first time the EU has set a specific rate of tax being the 3% rate. I acknowledge that VAT is set within a certain range but have the witnesses concerns about EU interference and involvement in our tax policy and that this might be the beginning of much more than that?

Ms Cora O'Brien

The fact that the European Commission is describing these measures as a bridge to a common consolidated corporate tax base, CCCTB, is worrying. That is the first step towards involvement in designing our tax rules. We have had a debate on CCCTB and we know that it in itself also directly affects our ability to set our own tax rates, as well as the base. Yes, we have real concerns about that issue.

Has the Irish Tax Institute examined the legal basis of it?

Ms Cora O'Brien

No, we have not. We have not got a legal opinion on the specific question of whether they can charge one rate. However, we certainly have been following the discussions that are taking place in the professional community. That issue has certainly been raised by legal people together with other legal issues that I outlined in my opening statement on proportionality and crossing over with indirect tax directives. There are legal issues. The EU has considered them and said it does not believe that it crosses over those, but legal experts continue to be concerned there are potential legal challenges open to people who want to take them.

Mr. McCaughey quite rightly pointed out measures we could take at home in the next budget to put our own house in order. We have long contended our domestic system leaves us open to criticism from abroad and in weakening the right to have our own system. Has the Irish Tax Institute suggestions for changes that can be made domestically to improve our image?

Ms Cora O'Brien

The Irish Tax Institute is working closely with the Department, Revenue officials and the Government on the implementation of outstanding elements of the BEPS programme. A very significant change to the Irish tax system is that we will be introducing controlled foreign company rules from 1 January next year.

We fully expect to see those in the Finance Bill. We are also working closely on the implementation of the updated transfer pricing guidelines, about which Mr. McCaughey spoke, and a number of outstanding issues. Base erosion and profit shifting, BEPS, implementation is a process in every country where it is happening. Therefore, not all the measures can be instantly adopted. Along with other countries, Ireland is working to make sure that they are implemented by the deadlines.

I will leave it at that. I thank Ms O'Brien.

I welcome the groups to the House. I have some brief questions. The criteria laid down are €750 million globally and €50 million from Europe. It is up to the companies to decide whether they fit those criteria. Revenue leaves it to the companies to decide if they come within those levels. Does Ms O'Brien see any problem with that?

Ms Cora O'Brien

If the companies meet the levels, they are automatically caught by the proposals. It is not optional in that way. The €750 million and the €50 million are the limits set out in the proposed directive and if they are exceeded, there is no optionality.

They are caught.

Ms Cora O'Brien

Yes.

At the beginning of the year these companies will decide to maximise the turnover and they will have to make provision for the 3% tax.

Ms Cora O'Brien

Yes.

If they fall short of the criteria for the €750 million globally or the €50 million from Europe, they are still collecting 3% tax from clients. What happens to the provision they have made? It is extra revenue for them. They have made the provision so they could make more money out of this. A company that may have an annual turnover of €500 million or €30 million in Europe might say that it can see an opportunity here that would allow it to up its prices, collect more money, make a provision and fall short at the end of the tax year so it would not have to pay the 3% tax.

Ms Cora O'Brien

There have to be thresholds of some sort if a tax such as this one is set. If that is done, there could be concerns, marginally, around the €750 million. The companies themselves would be concerned because they might not be able to predict whether they will go over or not.

I am not laying any blame on the companies, but there could be opportunities for them.

Ms Cora O'Brien

Approximately 100 companies will be involved in this proposal so I would guess that the majority of those companies will be well on the far side of the criteria for the €750 million. Any issues around uncertainty or the threshold are probably limited to a small number of companies operating with a turnover very close to that threshold, but I agree with the Senator. It is not an exact science. It is difficult to be precise about it but there is a process of looking back at their position for the past 12 months, so there is some element of being able to better predict it. The issue about being close to a threshold or whatever is a downside of having a threshold and is another reason an arbitrary number like €750 million is difficult to administer for everybody.

Ms O'Brien would not be in favour of it.

Ms Cora O'Brien

I do not believe we would be in favour of the tax at all because it is arbitrary, and that is just one element of its arbitrary nature. It is an arbitrary tax aimed at just a handful of particular types of companies. We believe the changes should go far beyond that and not be contingent on such specific numbers, facts and figures. It should be a more fundamental review of the principles underlying businesses operating in a digitalised environment.

The second question is on the calculations the Revenue Commissioners have made. The tax some of the larger companies based in Ireland would have to pay can be offset against their corporation tax here, which would lead to the State losing between €120 million and €160 million. Obviously, they get back approximately €45 million, which is the estimate, but it would be a loss to the State, not to the companies.

Ms Cora O'Brien

Yes.

Has Ms O'Brien looked into that matter?

Ms Cora O'Brien

Yes. I cannot comment on the actual number but in terms of the principle, that is the case because the expectation is that member states would grant a credit against the corporate tax base in their own jurisdiction for this tax. If that is the case, the Revenue has calculated what that number would be and from its data, it is saying it is €120 million to €160 million. That does stack up with what is outlined in the Commission's comments on the proposal, namely, that it is expecting member states to do that.

Ms O'Brien is basically against the scheme being brought in by Europe.

Ms Cora O'Brien

Yes. We believe that it is an arbitrary and a short-term measure. We would prefer to see a more fundamental review take place.

Both witnesses agree that the current tax collection systems have not moved pace with the changes in digital workings worldwide. In many cases, the tax structures harp back to an old industrial type age in terms of the way we are taxing.

Ms Cora O'Brien

Yes. We agree with that.

What we are looking for here is common ground. Do the witnesses believe that what is being proposed in Europe is effectively a Trojan horse to bring in a common consolidated corporate tax base, CCCTB, by some of the larger countries?

Ms Cora O'Brien

The long-term measure is where the EU sees its direction of travel going. The fact that it has said that if it gets agreement on this significant digital presence, which is the core of its long-term measure, it would be integrated into the CCCTB model. The ultimate object of the European Commission is to have a CCCTB with this significant digital presence definition included in it for digitalised businesses. It is quite upfront about its ambition in terms of the direction of travel in which this is going. We would certainly be concerned about that direction of travel.

Mr. Mike Lewis

As an organisation, we do not take a position on the CCCTB to the extent that it is an EU measure and we do not see what its impact might be in the countries where we work. However, whether it is within a system like the CCCTB or a more conventional tax system, there is a reason these proposals are being tied to the CCCTB, which is a general dissatisfaction with the idea of the nexus as it currently exists within the international tax system and the way profits are being allocated.

Whether or not one inserts it within some sort of unitary tax system like the CCCTB or a tax treaty, it indicates that there needs to be more fundamental thinking about nexus and allocation. We cannot get away from that fundamental pressure within the system just by rejecting these proposals and, by implication, rejecting a back door into the CCCTB.

Is there sufficient scope within the current OECD proposals to address this matter on a worldwide basis? If the current OECD proposals are insufficient, what are the areas that need to be broadened within the OECD to provide a global competitive solution? Tagging on that, I refer to more flexible economies like Ireland. We are exceptionally flexible. We have a small, open economy. Is there not an inherent flaw in the CCCTB about taxing on the basis of where sales are made rather than where they are generated? In effect, there is an unfair disadvantage being imposed on countries which are flexible and progressive in terms of moving with modern ways of doing business whereas the CCCTB is, in fact, an antiquated proposal as to how to tax. It penalises countries which are progressive in terms of going out there to get business and it leans in the main towards taxing where sales are actually destined. That is not where the economic activity comes from. It is a wider question. I ask the witnesses to address the OECD.

Ms Olivia Buckley

If I might come in on that, it is a very interesting way to look at the scope of what the EU is doing versus the scope of what the OECD is looking at. If one looks at the interim report, it is fair to say there is a much greater deep dive and wider breadth of analysis in, first of all, looking at the characteristics of digitalised businesses. One element of it is data usage, number of users and the role they play, and value creation. It is also saying, however, that we need to look more broadly to recognise other aspects of innovation, design, patents and intellectual property IP, which have been shown globally to have become an increasing part of digitalisation. If one looks only at user participation, the debate about how much value that creates and its allocation, there is a recognition absolutely by some countries of the role that plays but also looking at a wider breadth. It raises the point, interestingly, that one can have companies which are highly digitalised but which have no relationship with the number of users or data participation. An example is cloud computing.

One of the things we learned from the first phase of BEPS was that there was a universal acceptance that the rules had become broken. They creaked and did not match the pace of globalisation, world trade and the way in which business models were changing. If we have learned anything, it is what the OECD is highlighting to us; it is not just a quick fix for today. The World Economic Forum is telling us that the pace of transformation is at a rate we have not seen before and the trend is going to continue. The system has to be durable so that we do not find within ten years that we have developed a framework that is broken and which has failed to match the pace of change. The OECD is looking at value creation in a much broader sense and we have to appreciate that this is the breadth and scale we have to look at if we are going to have durable rules which pass the test of time. We want to get this right. If we were building any other kind of infrastructure, in particular physical infrastructure, we would ask ourselves whether it was going to last and stand us in good stead in 30 years' time. That is the question we need to ask of our tax infrastructure.

In computer parlance, one wants an operating system as well as the software.

Mr. Mike Lewis

At the risk of there being an alarming degree of unanimity on this side of the table, we said in our opening statement and in the report we put out in November that there were elements of the existing OECD-BEPS package which could help in this area, in particular around some of the aspects of the multilateral instruments in respect of which Ireland continues to reserve its position. I highlight to the committee the fact that Ireland has reserved its position on Article 12 of the OECD's multilateral instrument, which is supposed to deal with some of the situations in which companies do not have a bricks-and-mortar presence in a jurisdiction but are nonetheless doing business there. The Department of Finance's justification for reserving judgment on that part of the instrument was that it was waiting for the OECD to report back on some aspects of profit allocation to permanent establishments. The OECD has now reported back after the inclusive framework considered the matter and it would be good to get some sense of whether the Government is now ready to sign up to the article given that it is relevant to the digital discussion.

I direct my first couple of questions to the Irish Tax Institute on the structures of Irish taxation and tax practice. Does the institute consider that there is sufficient infrastructure in terms of tax analysis and the identification of who pays taxes and at what rates? I do not know whether the institute adopts policy positions, but does it consider it to be inherently wrong that a company which earns €500,000 a year over a five-or-ten year period, for example, should pay, in certain instances, no tax at all? What is the institute's view of the application of a minimum effective corporation tax rate? While it would start at a relatively low level, it would, over a period of time, cut out the scandal of very profitable companies paying little or no tax.

I am also concerned in principle about the following. In the context of discussions with the OECD and the EU, has it been possible to give any consideration to what will happen as there is greater robotic development in IT and IT-related industries, thereby reducing the need for labour? Even in a country like Ireland, the potential exists that the tax flow from taxes on labour will be significantly reduced. Robotic development has the potential to produce greater inequality in the sense that certain people will be concentrated in potentially very high-paying positions along with investors and the owners of companies in the sector while on the other hand there will be many more people, not just in developing countries but across the globe, working in much lower-remunerated positions, whether those are care positions, casual positions or whatever. Without some effort to create a fairer approach to identifying appropriate, fair and equitable taxation, we will end up with greater inequality, in particular in developing countries which produce a lot of raw materials, but also in countries like Ireland.

I am particularly concerned that the tax infrastructure in Ireland, in terms of analysis at public policy level, is very weak. We do not really have data on clusters. The data would have to be largely anonymised but we could probably guess the identities of some of the bigger companies. In the context of fairness and equity, the best way to find out about tax is to look for indicative amounts. This is a similar approach to that taken for individuals in the tax code. What kind of tax do people who earn over €100,000, €200,000 and €300,000 pay compared with people who earn €50,000 or less? The answer to that provides a fairly good picture of what the relative contributions are and whether those contributions are fair. We do not have any data development in Ireland which would help us to do that. Given that the institute is involved in training and accrediting future generations of people who are developing expertise in taxation, will our guests indicate what overall ethical framework is in operation? The long-standing principles of taxation are fairness, efficiency, equitability, knowability and that it is based in law. These principles are to be applied to all people, not just some.

Ms Cora O'Brien

I will answer the Deputy as best I can. On the issue of companies, the tax rates they pay and the concerns that have been raised generally about large multinational companies with low effective tax rates, based on analysis that has been carried out by others in Ireland, the key reason for the low rates was that they were global effective rates. BEPS legislation was developed because mismatches were enabling those who pay tax to sometimes achieve low effective rates. The effective rate of the profits that were properly attributable to Ireland was actually very close to the 12.5% rate.

Does the Ms O'Brien really believe that is the case for very high-earning companies? Do the data stand up? I know it is possible to get the answer to that, but does Ms O'Brien really believe that it is the case?

Ms Cora O'Brien

I really believe that the profits that were attributable to Ireland are being taxed at very close to 12.5%. I say that because our corporate tax base is so broad. It is one of the broadest bases there is. There are very few deductions. The biggest deduction is probably the research and development tax credit. Other than that, there is very little - in terms of what Ireland is entitled to deduct - that would reduce the effective tax rates on Irish-attributable taxable profits below 12.5%. The question the Deputy has raised is-----

The research and development tax rate is specifically designed to give a break and effect a reduction, which would mean a significant reduction from the 12.5%. Why is Ms O'Brien saying that the tax take from these companies is close to 12.5%? Many other countries have such a tax break; Ireland is not unique in that respect.

Ms Cora O'Brien

It depends on how much research and development a company is doing. I did not specifically mean that it was close to the 12.5%. The research and development tax credit is likely to be one of the main reasons that the rate can be reduced below the 12.5% in some companies. How far below the 12.5% rate it goes depends on how much research and development is being done relative to what the profits of the company are. The effective tax rate will depend on the weighting of those two things.

I understand the concern about the low effective tax rate. It would be very difficult to try to categorise companies operating in Ireland. I am not sure whether or not a debate on this issue has been held before. The global effective rates, rather than the Irish effective rate, are probably more interesting for-----

I am interested in both. The point made about global rates is fair, but I am interested in the Irish effective rate as well. I am also interested in the changes that are developing now. Notwithstanding the fact that the corporation tax flows to Ireland at the moment are very significant, it is interesting to consider how the cloud is developing and also developments in the area of robotics. Tax contributions via labour taxes are significant. VAT can also be significant. We do not rely solely on corporation tax. However, I am concerned that, given the way globalised structures are developing, there will be greater possibilities for companies to, in effect, evade tax almost everywhere.

Ms Cora O'Brien

The issue of labour taxes and the development of robotics are policy areas that definitely need to be looked at. Until now, we have been very focused on corporate profits and corporation tax, but in international literature and commentary we are starting to see discussion of the impact of robotics on payroll taxes. It is affecting the jobs that people are doing and the consequences of that, including the impact on payroll taxes. There is a concern that robotics should not replace people. It might change the type of work that people do. The challenge for policymakers is to try to ensure that people are provided with transferable skills, particularly in view of the development of robotics. The types of work people do might change but the quality of the work should not. This is a huge area that has been under-explored.

Do the witnesses believe we have sufficient infrastructure in terms of public administration and, indeed, universities and research organisations in Ireland to consider how we approach this so that we might avoid an even bigger jump into unfairness? It is also important that we get information to the public about how much tax is being paid. This is an issue that applies in the context of ordinary democracy.

Ms Olivia Buckley

To add to what my colleague said, the nature of the economy is changing. We are now seeing the gig economy, global digitalisation and robotics coming to the fore. That is a natural consequence of all we have spoken about today, but I do not believe that it can then be said that companies are evading or avoiding tax because the global workplace is changing.

I will give an example.

Deputy Burton should let Ms Buckley finish.

Ms Buckley will be familiar with the case of Uber and its position of simply being a hosting organisation as opposed to an employer.

Ms Olivia Buckley

In fairness, the Department of Finance has done a good deal of work on tax policy, with several consultations and papers released and tax policy conferences being held on an annual basis in recent years. As a consequence of Ireland's membership of the European Union, the OECD and other bodies, the topics the Deputy identified are starting to emerge. They are being looked at not just on a member state basis - we do not have all the expertise on the issue - but, rather, they are appearing on the agenda of the different councils and working groups of the European Parliament, the Commission and the Council. Our participation in both the EU and the OECD means that there is a good degree of focus on that. There is also a growing appreciation of some of the research. We are seeing the changing nature of economies, and the gig economy and the sharing economy are part of it.

That is why the OECD is looking at the changing nature of taxation in this area.

On the question of who pays what tax, a substantial amount of data is produced by the Revenue Commissioners and, during our own research for the purposes of budget preparation, we have access to a large amount of data. The Revenue Commissioners have invested a lot in technology and data analysis and have made a new appointment of a chief analytical officer in recent times, who kindly addressed our own annual conference two weeks ago. The information about who pays what tax, and at what percentage, is made publicly available and last week there was a report on corporation tax. We have studied personal tax and there is a lot of detail on the breakdown of the various salary brackets and whether people are paying tax on €70,000 or are exempt from tax.

I got the Revenue Commissioners to disclose much of their data ten years ago. These were data that they previously did not release. There were extreme situations with people on very low wages paying a lot of tax, although it was not necessarily by everybody's standards. In one example, people working in stables for trainers were often subject to taxes and PRSI while the individuals who owned the businesses were entirely exempt. Through the work of a lot of committees here, however, that changed over time. Does Christian Aid feel enough data are published in Ireland? As a body that engages in research, are the data available adequate for its analytical needs?

Mr. Sorley McCaughey

The world of taxation is very different from that which existed ten years ago and there have never been more people interested in it. Tax people are having their day in the sun and are public people in a way they have never been before. However, the world of public policymaking in the area of tax is limited to a very small number of people and that does not reflect the growing understanding and awareness of the function of taxation in the world today. I would, perhaps provocatively, characterise it in Ireland as a way of avoiding tax and that undermines some of the fundamental principles of an effective taxation system, one of which is to generate the revenue to ensure human rights for people across the world. There are redistributive and repricing elements to it as well and these are important.

There are not enough multidisciplines involved in public policymaking around taxation and we need a far greater input from those in the world of international law and human rights who are well versed in the area of robotics, from university lecturers and from professionals so that we expand it beyond the current very limited pool of people. With a limited pool and a narrow objective, one will get narrow outcomes and not the comprehensive outcome that tax requires.

One of the things Christian Aid and others have been advocating is the creation of a multi-stakeholder body to incorporate multidisciplines and to have a role in advising the Minister for Finance on elements of corporation tax that may have been missed by the people who have traditionally been involved in the area. We all know examples of egregious forms of tax avoidance which had existed for many years but which were only acted on in the past few years. However, I do not believe they would have happened had a broader pool of people been involved in advising the Minister. It has often been NGOs which have raised these issues with the Minister for Finance and they have often been acted on under duress but if there was a more collegial and constructive engagement with the Department, the Minister and a broad-based multi-stakeholder body, we would have a much more effective outcome.

On data, Mr. Lewis will speak to the challenges he came up against when writing the report in November. While some of the data challenges were probably understandable, he will also have something to say on areas where the data could have been made more freely available. The issue of public country-by-country reporting of company reports is current in the context of access to data, but it is opposed by the Government. If we have learned anything from the past ten years it is the importance of the role of the media and civil society in highlighting instances where there might be dubious cases of profit shifting between companies to avoid tax. The Government has an opportunity to lead and to be proactive in support of this policy. This would also have the benefit of ensuring there is no misunderstanding of the limited amount of information that is made available by companies, especially where that information is incomplete. Were public country-by-country reports made available in their entirety, people would have a more informed and better understanding of the activities of companies and this would eliminate the misunderstandings we sometimes see.

Mr. Mike Lewis

I will say a quick word about data and then deal with the Deputy's points about automation, which brings us back to the EU proposals we are talking about today. We did a lot of work last year on data produced by the Revenue Commissioners, the Department of Finance and other parts of Government. A lot of data relating to Ireland's economic linkages with developing countries are not publicly available because of confidentiality provisions in the statistics Act or taxpayer confidentiality in cases where there are a small number of individual or corporate taxpayers in a particular data point. This is particularly true in the case of linkages to smaller economies and there are good reasons for confidentiality provisions. It would be interesting, however, to explore whether the Revenue Commissioners and the Department could draw upon the data in a non-public way in order to do things like tax spillover analyses or if they could make the data available in a more granular form, on a country-by-country basis, which would not impinge on taxpayer confidentiality.

Automation and robotics is a huge topic of discussion in the international development arena and there are anxieties that countries which are already low on global value chains will fall further down the chains if large numbers of jobs are automated, such as those of flower pickers in Kenya, for example. The erosion of jobs and labour tax revenue from them is an area of economic transformation that will not be dealt with by the EU proposals. This is why it is important to get corporate tax right, particularly the factors for allocating profit. As automation and robotics trends continue, these represent further opportunities to attribute taxable profits to highly mobile intangibles. They will exacerbate some of the problems with mobile intellectual property and the location of highly mobile profit centres within low-tax jurisdictions, which we already see in other parts of the digitised economy. It is yet another cautionary warning that we need to get corporate profit tax right.

Ms Cora O'Brien

I will make a short comment on the data.

With a view to being helpful, we look a lot at the Revenue data, particularly around the budget. It is generally individuals' data but the principle is that we have spoken to and met with representatives of Revenue's statistics branch. Where we have felt there have been gaps in the data or other areas which might usefully have been included, the Revenue Commissioners have been very open to publishing more if the data are available. They have grown a lot in recent years and there is now a regular bulletin of statistical information which Revenue publishes and circulates to those on its email list. If there were areas where people wanted more data, Revenue would probably be open to including them where possible. It is right to note that corporate tax is probably a little bit more difficult, in particular at the top, in terms of identifying specific taxpayers. If Revenue could do it within the bounds of its confidentiality obligations, I think it would be very open to having the conversation. Certainly, that is the way we have found it.

I have one other question. It relates to the approach the Italians are taking to digital taxation and their proposal of a credit trade-off in respect of payroll tax flows in the country where there is an actual presence on the part of a company. In effect, many European proposals seem to come down to implementing a second form of turnover tax minus credits where the company is actually contributing. Given that Italy has been a lead country on this for a number of years, is there any awareness of those matters on the part of the taxation institute? Does the institute have any views on the Italian approach? Other countries have suggested in the past that they might also adopt that approach but it is not certain now that they will. I do not know if the institute follows the OECD in detail, but what does it think of where the latter is at in terms of its work?

Ms Anne Gunnell

The Deputy is correct that Italy has been at the forefront and was part of the initial proposal by four states which kicked off a lot of this debate at EU level. We do not have significant detail and we have not done a great deal of analysis on it, but we know Italy is very keen to apply a form of equalisation levy to turnover. We have similar concerns on that to those we have around the digital tax proposal the EU is putting forward. We have not done a detailed analysis of it, however.

I put the same question to Christian Aid.

Mr. Mike Lewis

We also have not looked at the Italian proposals in detail. We note, however, that there are always concerns with turnover taxes on digital sales and sales taxes in that they might more easily be passed to consumers and users as a matter of practicality than profit taxes. As such, our overwhelming message is that we want to get profit taxes right.

In terms of where the OECD is at, we have discussed this in some detail already. While we have said we are supportive of some of the areas of the existing BEPS package which could help in this area and which Ireland has yet to implement fully, it is worth noting that the original BEPS package was not intended to address two areas which the EU proposals do address. The first involves situations in which there is absolutely no presence on the part of a company in the jurisdiction in which its customers reside, which probably would not be dealt with by the kinds of permanent establishment, PE adjustments, in Article 12 of the multilateral instrument. I think that is the case, but I look to other experts around the table in that regard. The second area which the EU proposals address is the question of whether profits should be attributed based in part on the value created by users or their data. In that sense, there are things the EU is trying to do which are not in the current BEPS package. Our message is that, once again, these are being considered within the inclusive framework under action 1 of BEPS now but there is still disunity in the area. We urge all members of the inclusive framework, including Ireland, to be ambitious in that area, in particular in order to deal with those two problems.

At 3%, it is a huge tax and would allow huge money to be collected. As to ability to pay, where will the liability lie if a company gets into difficulties? Will it be in the country where it pays corporation tax? Who will have priority regarding the tax?

Ms Cora O'Brien

On issues relating to ability to pay, the first criterion will be which country has taxing rights. It will then be a question of whether the tax can be paid to the tax administration in that country. The question of which country has taxing rights will be determined with reference to the number of digital users in each country. There could be a number of member states claiming taxing rights over part of that 3% depending on the number of users in each one. Tax must then be applied nationally. As such, an inability to pay issue would have to be dealt with by the company. Money might be collected centrally through a one-stop-shop mechanism, but that would have to be agreed with the tax administrations to which each tranche of the tax was due.

If there was some funding there, would the national government have priority or would it be the EU? Where would the priority lie?

Ms Cora O'Brien

Europe is only setting the rules for dividing up the tax. Each member state would then have the right to that tax if the proposal is implemented.

I thank the witnesses for attending our meeting. The joint committee will consider the submissions which have been made. We will reach our conclusions at our next meeting. We may meet earlier than the currently nominated date if we schedule a meeting with the State Claims Agency, with which we have been in contact and which we have asked to attend. The clerk is seeking to arrange a date for that and will advise members of the outcome of those efforts.

The joint committee adjourned at 11.20 a.m. until 1.30 p.m. on Tuesday, 8 May 2018.
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