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Taxation in a world without borders​

As businesses expand virtually with no need for a physical presence, digitalisation of the economy poses an immense challenge to the international tax system. RSM Ireland Tax Partner, Aidan Byrne, features in the Business Post Corporate Tax report.

New and advancing technologies help businesses to expand their global footprint with increasing ease and speed, said Tax Partner, RSM Ireland, Aidan Byrne.

National borders are less relevant in the digitalised business world. Companies operate internationally using technology to target customers and deliver offerings. “Indeed, digitalisation of the economy is considered a key driver for innovation and economic growth,” said Byrne. “Yet it is proving a huge challenge for the international tax system.”

International tax rules generally allow countries to tax the profits of non-resident companies attributed to a physical presence in that country, a permanent establishment. Traditionally when a company was setting up business in another country, a physical presence was created through opening a branch, office or factory in that country to serve the needs of local customers. “Companies can now launch businesses in other jurisdictions without the need for any physical presence, targeting customers with digital advertising and delivering product on digital platforms,” said Byrne.

The traditional basis for collecting corporate taxes from companies based on physical presence in customers’ jurisdictions is being eroded, said Byrne. Taxing rights of sovereign nations and well-established international tax treaty principles are becoming increasingly unfit in the global digital economy. “The OECD, of which Ireland is a member country, has been examining for some time now various ways to tackle this challenge - whether, and how, businesses should be taxed when they have a virtual, digital presence in a country but no physical presence,” he said.

Earlier this year, the OECD announced that its members have adopted a programme of work setting out a process for agreeing a global consensus for taxing multinational enterprises. The OECD has set an ambitious target of 2020 to deliver on the programme. The EU has also been examining the challenge of taxing the digital economy.

“The EU proposals would need unanimity from all member states however with some already expressing concerns; as a tax on revenue rather than profits, the tax would still have to be paid by loss-making companies; and it may result in businesses suffering double tax that would not be relieved under existing tax treaties,” said Byrne.

Challenging times lie ahead according to Byrne. “Making fundamental changes to the taxing rights of sovereign states requires multinational political engagement and cooperation, and some countries will inevitably benefit more than others if companies operating digitally become taxable in countries where their customers are based, rather than where they are headquartered,” he said.

Meanwhile many countries have already begun to introduce their own measures to tax the digital economy at a national level. France has introduced a 3% digital sales tax. The UK plans to introduce a similar 2% digital sales tax in 2020, Israel and India have introduced significant economic presence tests for creating permanent establishments and the UK and Australia have introduced specific tax regimes for multinational enterprises with diverted profits taxes. The US has introduced its base erosion and anti-abuse tax measures. “These unilateral tax measures also work to increase complexity and uncertainty for businesses operating across multiple jurisdictions,” said Byrne.

“Reaching a global consensus on taxing the digital economy would result in a more consistent, certain trading environment for international businesses in the long run,” said Byrne. “However, countries such as Ireland, where the economy has a large technology and digital corporate base that trades internationally, face conflicting challenges. A fundamental shift away from taxing companies where they have physical presence to taxing them where their customers are located will inevitably result in a reduced corporate tax take in Ireland. Yet these companies are foreseeing additional foreign taxes from unilateral national measures.”

Despite the uncertainty we continue to see companies choosing Ireland to develop and expand their businesses. There are non-tax reasons why this is so, but regardless of these tax remains a key consideration. The cornerstone on which our system is built is the 12.5% CT rate, and continued reiteration by Government that this will continue is key to continued success in attracting FDI into Ireland.

It is essential that businesses plan for tax accordingly when operating digitally across jurisdictions. At RSM Ireland, with international tax colleagues based in more than 130 countries worldwide we are well placed to assist companies as they begin or continue their international expansion.

 

As seen in the Sunday Business Post, 1st December 2019.