Michael Taft: Breaking The Consensus On Multinational Taxation

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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.

Rollingnews

20 thoughts on “Michael Taft: Breaking The Consensus On Multinational Taxation

  1. Ollie Cromwell

    The Digital Services Tax is just the prelude to the EU’s long-term plan for a harmonisation of all taxes.
    Ultimately their goal is total control of all taxes and budgets for those countries they don’t already have power over.
    It’s why Merkel knows the contents of Ireland’s budget before taxpayers here do.

    1. Increasing Displacement

      Provide evidence of what you said, irrefutable please and not your, or someone else’s opinion.

  2. Vanessa off the Telly

    Super bit of work there Dr Taft

    And fair play for someone mentioning that Labour are starting to get a few things right
    ’cause if t’was me I’d only be opening the door for another squall of malice eaters

  3. johnny

    Ireland on why the Irish govt is opposing it per Pascal-this is who is defending Irelands tax sovereignty against a tariff-wow!
    -3 reasons
    precedent setting-tax creep.
    tax on turnover v profit-new model.
    Europe doing solo run w/o international agreement

    very poor delivery and articulated points,he was not very convincing,this completely undermines Irelands appeal to US companies,as it leads to uncertainty on tax sovereignty and is basically economic hari kari by Labour.

  4. milk teeth

    The EU already dictates that we must have VAT – a tax that disproportionately taxes those less able to pay (against the pan European norms of taxation i.e. those who can should pay the most) so why don’t the green-jerseyists take aim at that first!

    1. Rob_G

      … VAT – a tax that disproportionately taxes those less able to pay

      Not necessarily – essentials like food are zero-rated. If lower-paid person was cooking at home, and a higher-paid person ate out often, the VAT burden is falling much more heavily on the higher-earner, for example.

      “… against the pan European norms of taxation i.e. those who can should pay the most)

      Actually, Ireland has the most progressive tax system in the OECD – high-earners pay a lot, low-earners pay relatively little.

      1. Fact Checker

        That’s a bit of a stretch.

        VAT (and particularly excise) are regressive for two reasons:
        1) poor people spend all their income, rich people save quite a lot
        2) poor people have a more tax-rich consumption bundle (a lot of cigarettes in particular)

        My personal rule is to never deny that Ireland has a very progressive personal income tax system, but always at the same time acknowledge that consumption taxes are regressive and offset the progressivity of the personal income tax system to some extent.

        1. Rob_G

          Sin taxes are punitive by nature – govts set them high so that people won’t do things like smoke or drink alcohol.

          Also, they are elective – these high rates of excise can be avoided by not drinking or smoking (or driving a car).

  5. Fact Checker

    Hi Michael

    Should Ireland get to tax a share of the profits VW makes on the several thousand cars it makes in Germany and sends to Ireland to be sold?

    I mean Ireland is where the user is at the time of consumption, so isn’t it only fair that these profits are taxed in Ireland too?

    1. milk teeth

      Isn’t the point that user data is a huge component of the digital companies output. So if say the engine of the car (probably an appropriate analogy) was made in Ireland then it would be taxed as such – so the new tax is trying to extrapolate the value added from user data in the same way that where components of traditional industry are spread around they tax is paid in areas where those components are made.

      1. Fact Checker

        It’s worth looking at the proposal:

        “This proposal would enable Member States to tax profits that are generated in their territory, even if a company does not have a physical presence there……The new rules will also change how profits are allocated to Member States in a way which better reflects how companies can create value online: for example, depending on where the user is based at the time of consumption.”

        What on earth is different from bricks and mortar businesses?

        On these principles, shouldn’t Ireland be able to tax VW’s German profits? I mean, how can VW make profits without the people in Ireland who want to buy its cars?

    2. Michael Taft

      Fact Checker,the EU is making the distinction – in one of many arguments they have put forward for the new tax – between the consumer who has no part in the production of the product in question (your example of VW) and the consumer in the digital world who is actively involved in the production. This is one of many ways how the digital economy is rewriting the rules of production, consumption and location. If the debate focused on that we might have more clarity and the debate would be more informed.

      1. Fact Checker

        Disentangling production and consumption is very difficult with ALL services – not just digital ones!

        A French firm that audits a German one provides a cross-border service. The French firm cannot provide that service without intimate knowledge of the consumer (the German one). The service provided by the French firm depends on the information provided by the German one.

        Where should this activity be taxed? Currently the profits that accrue from the activity are taxed in France, because that is where the firm is based and carries out the work. Why should digital services be different from normal ones?

          1. Fact Checker

            I would add that generating value from user-supplied content is nothing new.

            This is what polling and market research firms have been doing for fifty years.

            UK polling firms regularly survey Irish customers to generate useful datasets of their preferences for all sorts of things. These insights are then sold to firms who want to sell them physical products in Ireland.

            This is not really a ‘digital’ service. It is a service provided to a third-party that cannot exist without a lot of voluntary data from individuals.

            Should the UK firm (which designs, administers, and reports on the research from the UK) be taxed on work it does on the Irish population?

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