From top: Labour Party leader Brendan Howlin at the party’s conference last Saturday, where he urged support for the EU’s digital sales tax; Michael Taft
Deputy Brendan Howlin made a surprising announcement during his leader’s speech to the Labour Party conference last weekend: Labour will support the EU’s digital services tax.
Labour is the first parliamentary party to break the green-jersey consensus to support this tax. The Workers’ Party has also come out in support of this measure (these are the only parties I know that are doing so; if I am mistaken I gladly stand corrected).
The digital services tax is a proposal from the European Commission to allow EU countries to impose a levy on the sales of digital services made in their own jurisdiction by large companies.
It has been described – especially by Irish detractors – as a tax on turnover as opposed to the traditional tax on profits but that is not the full story.
As the EU Commission puts it:
‘In the digital economy, value is often created from a combination of algorithms, user data, sales functions and knowledge. For example, a user contributes to value creation by sharing his/her preferences (e.g. liking a page) on a social media forum.
This data will later be used and monetised for targeted advertising. The profits are not necessarily taxed in the country of the user (and viewer of the advert), but rather in the country where the advertising algorithms has been developed, for example. This means that the user contribution to the profits is not taken into account when the company is taxed.’
In one respect, this is probably a rationalisation, though that doesn’t make it any less valid. A key driving force is the fact that digital companies are guilty of some of the most aggressive tax planning among multi-national companies, using sophisticated accounting and company formation strategies to drive down their tax payments.
This, and the prospect that some EU countries will unilaterally introduce their own digital levies, has prompted the EU Commission to make this proposal.
This levy has been widely criticised in Ireland as a ‘tax-grab’ by larger economies; as infringing ‘sovereignty’ over tax; and as he EU is ganging up on small countries.
However, these criticisms don’t stand up to close scrutiny. Either we let large digital companies decide where they pay tax (and how much) or we subject them to some type of democratic accountability.
For all its many faults, the EU represents a public response.
Rather than undermining Irish ‘tax sovereignty’, the tax-avoidance practices of many multi-nationals, including digital companies, are eroding the tax base of other countries and, so, their sovereignty. The digital services tax actually helps restore countries’ control over their tax base.
And if Ireland is being ‘ganged-up’ on, it is due to its key role in the global tax avoidance chain.
Another criticism is that this would undermine Ireland’s attractiveness to foreign capital. However, we are not relatively worse off given that this is an EU-wide measure. And foreign companies will still retain sufficient taxable income here and enjoy our low tax rates.
But supporting tax accountability over multi-nationals raises a number of other issues.
There is no doubt this would reduce Ireland’s corporate tax take. The Revenue Commissioners estimate a loss of €160 million from the digital services tax, but international tax experts I have spoken to suggest the figure could be much higher.
This will have to be made up with higher taxation in other areas; if not, we would have to resort to spending cuts.
Some commentators have said that the digital services tax – and other EU measures designed to counter aggressive tax planning – would undermine Ireland’s business model. If that means a model based on tax incentives that facilitate global tax avoidance, then that is a good thing.
But what comes after that? What policies do we need to attract foreign direct investment on a sustainable basis while building an internationally-competitive indigenous sector?
We need to start that debate now – and any new model shouldn’t start with tax breaks.
At the end of the day, even if international tax justice doesn’t float your boat, supporting measures like the digital services tax can be based on a hard-headed pragmatism.
The game is up.
The Government knows this, the Department of Finance knows this, even the Big Four accounting firms know this. We need to get ahead of the curve on this so that we can cut the best deal possible. Claiming that there is nothing to see here is no longer sufficient.
So Labour’s position is welcome. It certainly marks a policy change in matters relating to multi-national taxation, given their recent support for the Government’s decision to appeal the Apple tax ruling.
The logical extension of supporting the digital service tax – and the logical position of progressive politics in general – should be to support the principle of the Common Consolidated Corporate Tax Base and the Financial Transactions Tax.
These are, after all, part of a long journey with the goal of imposing democratic accountability on multi-national companies and finance capital.
Supporting the digital services tax is a good first step.
Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front.