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Digital Tax - what is it for?

  • 21-03-2018 4:00pm
    #1
    Sam Russell
    Moderators, Science, Health & Environment Moderators Posts: 19,358 Mod ✭✭✭✭


    The EU Commission is proposing a 'Digital Tax' based on turnover to be paid to the country where the customer is based.

    How can this possibly work? Say an Australian internet company takes an advert for a Korean Car aimed at consumers in Germany - who pays what, and how do they police it?

    https://www.irishtimes.com/business/economy/european-commission-proposes-3-turnover-tax-for-digital-companies-1.3434928
    The European Commission has proposed a directive to require digital businesses to pay tax on profits generated in states where they have a significant digital presence, even if they are not physically located there.

    The Commission is also seeking an “interim” digital services tax at EU level, to be levied at 3 per cent on turnover. This would apply to services provided by digital companies where user participation and user contributions play a central role in value creation – services like the sale of third party goods online through sites will be targeted rather than direct sales by those sites.

    Some 120-150 companies throughout the union, European, US and Asian, would be affected by the interim tax, the commission estimates. It would remain in place until a long-term solution to the challenge of taxation of digital profits was agreed at international level.

    I cannot see how it could possibly work. Why not put an extra 3% on the applicable rate of VAT for online sales?


Comments

  • #2
    Peregrinus
    Registered Users Posts: 26,050 ✭✭✭✭Peregrinus


    Sam Russell wrote: »
    The EU Commission is proposing a 'Digital Tax' based on turnover to be paid to the country where the customer is based.

    How can this possibly work? Say an Australian internet company takes an advert for a Korean Car aimed at consumers in Germany - who pays what, and how do they police it?
    If what the internet company is selling is, basically, exposure (through a digital interface) to consumers in Germany, the revenue from that is to be taxable in Germany. The idea is that profits from digital services should be taxed in the place where the profits are generated, which is where the revenue-generating digital interface occurs.
    Sam Russell wrote: »
    I cannot see how it could possibly work. Why not put an extra 3% on the applicable rate of VAT for online sales?
    Because currently an Australian internet company selling advertising to a Korean car manufacturer does not pay VAT in any European country, so there is no VAT rate to increase.


  • #3
    joeguevara
    Registered Users Posts: 7,993 ✭✭✭joeguevara


    It’s a super VAT that attacks turnover rather than profit. If a company is incorporated in Europe and books business then that will be subject to 3% tax. It is irrelevant if they move the money out off shore for profits (which they are doing at the moment which is why they pay little tax). It is an innovative approach because Europe is aware that they have no autonomy or authority to make Ireland increase its corporate tax rates. So this is a way of obtaining revenue at source.

    The affect this will have is unknown. The large digital companies need a European base because if it was held outside the EU, then data protection requirements would be too onerous. In my opinion this will not go through. Although it is targeted at the likes of Facebook, google, twitter etc, it will affect every internet based business. These are people who vote, and live in the countries rather than the big US corps. No one can afford to pay an extra 3% especially when margins are so low.

    Secondly, if it did go through, more than likely Ireland could reduce the VAT rate for digital turnover by 3% making the charge futile. This is an ill thought out plan by people who are jealous of our tech industry. Not too worried about this.

    I am more worried by the fact that people can stop huge employment and industry by complaining about planning permission. We really blotted our copybook after the Athenry fiasco and who knows how many jobs, (construction, tech, service etc. have been lost now and in the future.


  • #4
    Peregrinus
    Registered Users Posts: 26,050 ✭✭✭✭Peregrinus


    Well, the EU proposal is that the amount paid in digital revenue tax should be deductible in computing tax on profits, so double taxation should be avoided. If this works, the effect should be to transfer (some) tax revenue from the country in which the enterprise is headquartered/resident to the countries in which it generates its income through digital contacts. For companies which do all their business in the country in which they are resident/taxed, this should be a wash-through.

    Also, note, it's proposed as an interim measure. Long-term, the Commission wants to change the basis of corporate income tax so that it is levied not in the country of residence/management, but in the country or countries in which revenue is generated.


  • #5
    RDM_83 again
    Closed Accounts Posts: 4,116 ✭✭✭RDM_83 again


    Peregrinus wrote: »
    Also, note, it's proposed as an interim measure. Long-term, the Commission wants to change the basis of corporate income tax so that it is levied not in the country of residence/management, but in the country or countries in which revenue is generated.

    How would this interact with the Irish guarantees around tax?


  • #6
    Peregrinus
    Registered Users Posts: 26,050 ✭✭✭✭Peregrinus


    Well, Ireland can only make decisions around what taxes Ireland will levy. There is nothing Ireland can do to stop, e.g., the German government from taxing you in relation to your activities in Germany.

    But of course Germany wouldn't be acting unilaterally here. It's proposed that this new approach to taxing income generated from digital interactions be introduced on a co-ordinated basis by all EU member states. And obviously Ireland as an EU member state is in a position to influence the shape of this proposal to some extent, as it is developed from the Comission's initial suggestion.


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  • #7
    joeguevara
    Registered Users Posts: 7,993 ✭✭✭joeguevara


    Peregrinus wrote: »
    Well, Ireland can only make decisions around what taxes Ireland will levy. There is nothing Ireland can do to stop, e.g., the German government from taxing you in relation to your activities in Germany.

    But of course Germany wouldn't be acting unilaterally here. It's proposed that this new approach to taxing income generated from digital interactions be introduced on a co-ordinated basis by all EU member states. And obviously Ireland as an EU member state is in a position to influence the shape of this proposal to some extent, as it is developed from the Comission's initial suggestion.

    But is t it the case that Ireland can reduce the VAT rate it applies to body corporates by the same amount that is charged by the EU digital tax which nullifies it. Similar to how they decreased VAT in the hospitality industry to 13.5%.

    There is no way they have thought this through.


  • #8
    Peregrinus
    Registered Users Posts: 26,050 ✭✭✭✭Peregrinus


    No. As already pointed out, people who make money by showing ads to Irish eyes don’t currently have to pay any VAT in Ireland. So there is no Irish VAT to be reduced.


  • #9
    joeguevara
    Registered Users Posts: 7,993 ✭✭✭joeguevara


    Peregrinus wrote: »
    No. As already pointed out, people who make money by showing ads to Irish eyes don’t currently have to pay any VAT in Ireland. So there is no Irish VAT to be reduced.

    If the company was incorporated in Ireland would the revenue be generated in Ireland and therefore VAT applied, or is it generated where the customer is based?


  • #10
    TanyGray
    Banned (with Prison Access) Posts: 52 ✭✭TanyGray


    Maybe they should stop all this crap of trying to make us pay more tax and just pool all tax paid in Europe and share it out equally among the entire EC.
    Bet Germany and France wouldn't be interested in that though.


  • #11
    Peregrinus
    Registered Users Posts: 26,050 ✭✭✭✭Peregrinus


    joeguevara wrote: »
    If the company was incorporated in Ireland would the revenue be generated in Ireland and therefore VAT applied, or is it generated where the customer is based?
    This gets pretty complicated pretty quickly, because of course tax laws are different from country to country. But a fairly standard arrangement would be like this:

    Take the example given above - Australian internet company serves up ads for Korean car manufacturer to Irish eyes. Is paid by Korean car manufacturer.

    Any sales tax/GST/similar on the sale of the advertising will be levied in Korea, because that's where the sale takes place.

    The internet company pays income tax on its profits in Australia, because that's where its business is run.

    The proponets of this new proposal point out that the economic-value-generating activity is happening in Ireland, because that's where the ads are being served up to the potential car buyers. So it argues that Ireland should be capturing a share of this value in tax.

    It's not just for things like advertising - take a peer-to-peer service provider like Air BnB. A property in France (say) belonging to a Swedish resident is let on Air BnB to an American who is planning a trip to France. Where is the value being created?

    In short, the digitiation and globalisation of commerce has made obsolete older concepts employed in tax legislation like residence, place of management, etc. There are huge opportunities for multinationals to game the system and pay little or no tax. This is unfair to smaller, domestic companies who don't have the same opportunities, who end up paying much higher tax rates, and find it hard to compete. E-retailers, for example, typically pay much lower overall taxes than their bricks-and-mortar competitors (or than small e-retailers who operate only or mainly in one jurisdiction).

    The digital revenue tax is an attempt to come up with a model for taxation which would avoid, or at least reduce, these inequities.


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  • #12
    Sam Russell
    Moderators, Science, Health & Environment Moderators Posts: 19,358 Mod ✭✭✭✭Sam Russell


    Peregrinus wrote: »
    This gets pretty complicated pretty quickly, because of course tax laws are different from country to country. But a fairly standard arrangement would be like this:

    Take the example given above - Australian internet company serves up ads for Korean car manufacturer to Irish eyes. Is paid by Korean car manufacturer.

    Any sales tax/GST/similar on the sale of the advertising will be levied in Korea, because that's where the sale takes place.

    The internet company pays income tax on its profits in Australia, because that's where its business is run.

    The digital revenue tax is an attempt to come up with a model for taxation which would avoid, or at least reduce, these inequities.

    I think that this is all a bit like Intellectual Property. If I design a widget that is very innovative and I get a registered design and a patent on it. I put the IP into a sister company in a Caribbean tax haven. I get it manufactured in Vietnam for €1 per item, but market it for €100, and get billed by my Caribbean sister company that owns the IP €98, and pay Irish CT on the €1, there is a lot of lost tax to the Irish Revenue.

    It is even more complicated with the idea of 'digital' business. Where is the value in a Google targeted ad? Who has seen it and who acted on it? Ask Cambridge Analytical where the value is?


  • #13
    Franz Von Peppercorn
    Closed Accounts Posts: 7,070 ✭✭✭Franz Von Peppercorn


    Peregrinus wrote: »
    Well, the EU proposal is that the amount paid in digital revenue tax should be deductible in computing tax on profits, so double taxation should be avoided. If this works, the effect should be to transfer (some) tax revenue from the country in which the enterprise is headquartered/resident to the countries in which it generates its income through digital contacts. For companies which do all their business in the country in which they are resident/taxed, this should be a wash-through.

    Also, note, it's proposed as an interim measure. Long-term, the Commission wants to change the basis of corporate income tax so that it is levied not in the country of residence/management, but in the country or countries in which revenue is generated.

    That’s a huge change. Surely this is in violation of most tax treaties.


  • #14
    Peregrinus
    Registered Users Posts: 26,050 ✭✭✭✭Peregrinus


    At the moment it's only a proposal. I don't think it's a violation of standard tax treaties; not many countries would willingly sign a treaty limiting their ability to increase taxes, or impose new taxes, so tax treaties don't generally forbid this.

    But, yeah, it will piss off the Americans, since many of the multinational digital companies which benefit so hugely from the current arrangements are US-based. But at the same time the Americans recognise that there's a genuine issue here that needs addressing. There own tax base has been eroded by digitisation too.


  • #15
    Franz Von Peppercorn
    Closed Accounts Posts: 7,070 ✭✭✭Franz Von Peppercorn


    Peregrinus wrote: »
    At the moment it's only a proposal. I don't think it's a violation of standard tax treaties; not many countries would willingly sign a treaty limiting their ability to increase taxes, or impose new taxes, so tax treaties don't generally forbid this.

    But, yeah, it will piss off the Americans, since many of the multinational digital companies which benefit so hugely from the current arrangements are US-based. But at the same time the Americans recognise that there's a genuine issue here that needs addressing. There own tax base has been eroded by digitisation too.

    Thanks for your expertise.

    However isn’t pissing off the US largely going to lead to a trade war. Not just because of Trump, the previous administration was hostile to this too.

    Also, outside of the advertising - which I get - what’s the situation where a digital service is consumed or is downloaded. A game for instance. That digital download is already I think, subject to vat. Is it also subject to this extra tax in the country of the downloader?


  • #16
    Peregrinus
    Registered Users Posts: 26,050 ✭✭✭✭Peregrinus


    In general countries don't tax exports. So if you, in the US, download a game or a film or whatever from my server in Ireland, and you pay me for it, that will not attract Irish GST.

    From the US's point of view, the transaction is an import, and they might want to impose some kind of tax or duty but, in practice, this is difficult to do.

    And it creates a distortion, in that if you bought the same content from a US provider, the US could (and I suspect would) impose sales tax or similar on the purchase. Which puts the US providers at a disadvantage. And why would the US want to disadvantage its own businesses?

    But if the locus of taxation is moved from the point of sale to the point of delivery, these distortions disappear. You, the consumer, will pay the same tax, whether you buy from a US or foreign supplier. Ireland isn't losing any revenue here, because they were never getting any in the first place.


  • #17
    Franz Von Peppercorn
    Closed Accounts Posts: 7,070 ✭✭✭Franz Von Peppercorn


    Peregrinus wrote: »
    In general countries don't tax exports. So if you, in the US, download a game or a film or whatever from my server in Ireland, and you pay me for it, that will not attract Irish GST.

    Does it attract sales tax?
    From the US's point of view, the transaction is an import, and they might want to impose some kind of tax or duty but, in practice, this is difficult to do.

    And it creates a distortion, in that if you bought the same content from a US provider, the US could (and I suspect would) impose sales tax or similar on the purchase. Which puts the US providers at a disadvantage. And why would the US want to disadvantage its own businesses?

    But if the locus of taxation is moved from the point of sale to the point of delivery, these distortions disappear. You, the consumer, will pay the same tax, whether you buy from a US or foreign supplier. Ireland isn't losing any revenue here, because they were never getting any in the first place.

    Well the US could lose revenue. Remember these companies are now tax compliant from a US point of view.

    To me a version of sales or vat charges is the solution for all digital downloads, paid in the consumer country.

    This isn’t a tax on the company though and could still lead to accusations of tax avoidance. Apple isn’t a digital downloads company and is still accused of avoiding tax even though VAT is paid on their sales.


  • #18
    Sam Russell
    Moderators, Science, Health & Environment Moderators Posts: 19,358 Mod ✭✭✭✭Sam Russell


    Franz Von Peppercorn wrote: »
    Does it attract sales tax?



    Well the US could lose revenue. Remember these companies are now tax compliant from a US point of view.

    To me a version of sales or vat charges is the solution for all digital downloads, paid in the consumer country.

    This isn’t a tax on the company though and could still lead to accusations of tax avoidance. Apple isn’t a digital downloads company and is still accused of avoiding tax even though VAT is paid on their sales.

    iTunes?


  • #19
    Franz Von Peppercorn
    Closed Accounts Posts: 7,070 ✭✭✭Franz Von Peppercorn


    Sam Russell wrote: »
    iTunes?

    True. Forgot that.


  • #20
    Peregrinus
    Registered Users Posts: 26,050 ✭✭✭✭Peregrinus


    Franz Von Peppercorn wrote: »
    Does it attract sales tax?
    Ireland doesn't have a sales tax (other than VAT) so the issue wouldn't arise.

    Reverse the situation; if I make a digital purchase from a server in the US, does sale tax apply in the relevant US state? No. Countries generally think it's a bad idea to tax their own exports, which is what this would be.
    Franz Von Peppercorn wrote: »
    Well the US could lose revenue. Remember these companies are now tax compliant from a US point of view.

    To me a version of sales or vat charges is the solution for all digital downloads, paid in the consumer country.
    But the digital revenue tax is looking at a wider question than simply who pays for a digital download.

    What the Australian internet company is selling to the Korean car manufacturer is exposure to Irish eyes, the attention of Irish consumers. The thinking here is that that's an Irish resource which is being exploited for profit, and the Irish community should be able to capture some of the value generated. Hence the Australian internet company would pay some tax in Ireland, because what it is selling is the attention of its Irish users.


  • #21
    Sam Russell
    Moderators, Science, Health & Environment Moderators Posts: 19,358 Mod ✭✭✭✭Sam Russell


    Peregrinus wrote: »
    Ireland doesn't have a sales tax (other than VAT) so the issue wouldn't arise.

    Reverse the situation; if I make a digital purchase from a server in the US, does sale tax apply in the relevant US state? No. Countries generally think it's a bad idea to tax their own exports, which is what this would be.

    US sales tax does not usually apply to out of state sales, not just sales outside of the USA.

    Now there are arrangements between some states to recover such sales tax, but as far as I know, not all states do this. This applies to the likes of sales by Amazon.


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