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EU Digital Tax

The Enemy Within is becoming more defined. Expect more kite flying as the embryonic plans develop, but the first indications of how it might take shape were issued this week. And they do not look good for Ireland. Fine Gael MEP (Member of European Parliament) Brian Hayes has gone as far as to describe them publically as a “tax grab”.

Having decided that simplicity is key, the EU outlined on 21st March a blunt, crude and (from an Irish perspective) destructive tax, based not on

barry flanagan Global Tax Director at Immedis
Barry Flanagan Global Tax Director at Immedis

profit, but on revenue. While the ultimate “Proposal 1” outlined is a profit based tax, the interim “Proposal 2” taxes revenue. And as we know in Ireland from bitter experience with the Income Levy, temporary and interim taxes historically have habit of becoming permanent (modern income tax itself, in fact, was a “temporary” tax introduced by Pitt the Younger in 1798).

The EU proposal states that an “estimated €5 billion in revenues a year could be generated for Member States if the tax is applied at a rate of 3%”. Small potatoes in the greater EU scheme of things. Ireland’s CT(corporate tax) take has increased by almost exactly this amount between 2011 and 2017. But the intention seems to be that this €5 billion will come exclusively from smaller states.

Ireland will have allies in resisting the introduction of this new Tax in Luxembourg, Belgium and the Netherlands, but the resistance will need to pick its battles. Facebook, through Cambridge Analytica, have sealed their own fate on this. Whatever modicum of goodwill existed towards these companies in the public consciousness (and it really was minimal) has now evaporated.

The focus will have to be not on resisting the new tax outright, but on reforming how it is calculated. Part of this battle will be ensuring that IP(intellectual property) is included in the “asset base” when determining a company’s presence in each jurisdiction. Initial recommendations had specifically excluded IP, which massively distorts the picture and potentially leads to a situation where each country’s share is subject to a greater influence depending on property market fluctuations than on where their IP (usually worth many multiples) has been developed and managed.

The final point on this is the risk it poses to EU/US relations – which of course are already under strain. The US pulled back from including the EU in the steel tariffs but how they will react to what could be interpreted as a direct attack on almost exclusively US based companies will be….interesting. To say the least.