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OECD report hails a sea change in the digital economy

Wednesday, 26 March 2014   (0 Comments)
Posted by: Author: Colm Keena
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Author: Colm Keena (The Irish Times)

Changes in global tax code will have major ramifications for Ireland

The digital era has hugely transformed the world of business and the pace of the change has been such that the many of the concepts that used to rule the world of international business taxation are in need of remodelling.

Ireland’s success in attracting foreign direct investment predates the digital age, but has been accelerating over recent times because of the key position it has come to play in the international tax structures of many of the biggest technology corporates currently striding the globe.

In a draft report released to interested parties by the Organisation for Economic Co-operation and Development yesterday, and seen by The Irish Times, Ireland’s extraordinary position in this aspect of globalisation is illustrated in a table which shows that India (population 1.23 billion) was responsible for 13.5 per cent of the world’s ICT services exports in 2012, followed by the Republic (population 4.6 million), with 12.7 per cent of all exports, and only then the United States (population 314 million), with 8 per cent of all exports.

That such a small country should be the second-ranked in the world in this sector puts into context the importance to Ireland of efforts currently under way at OECD and G20 level to raise more tax from multinationals.

In July last year, the OECD came out with its Action Plan on Base Erosion and Profit Shifting, and pointed at some of the areas it thought should be the focus for change. Now the same body has produced a draft or discussion report on one of the areas identified in the July publication – The Tax Challenges of the Digital Economy.

One of the key areas of change likely to arise from the OECD exercise is the alteration of the rules concerning what constitutes a "permanent establishment”.

This is the code that governs whether a company that sells stuff in a particular country, falls to be taxed in that country. There has been controversy about Amazon, which conducts huge sales in the UK, from enormous warehouses there, but books the profits from the business in Luxembourg.

Associated profits

It seems inevitable that the rules are to be changed so that there will be a closer alignment in the future between where sales occur, and where the associated profits are taxed. Companies may be deemed to have a "digital” presence in the markets in which they operate.

In broad terms, this would be bad for Ireland Inc, as its low 12.5 per cent corporation tax rate would thereby become less relevant.

On the other hand, US technology companies that have European headquarter operations here, usually funnel their income via Dublin to subsidiaries that are tax resident in Bermuda or the Cayman Islands.

This sort of practice is another issue that is in the OECD’s sights, and closing it down could well increase the amount of income that would become taxable in this jurisdiction. Time will tell how these two trends balance out. And they are just two of numerous changes in the OECD pipeline as it seeks to tweak the global tax code.

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