On the day the proposals were first published, Ireland's Minister for Finance, Paschal Donohoe, issued the following statement: "As usual, Ireland will work with other member states to critically assess the proposals from the Commission. This is the beginning of a process that will go on for some time in parallel with the work of the OECD. It is noteworthy that the OECD report did not find consensus among countries on this issue."
Since then, the proposals have been considered by the Irish government. In May, Ireland was one of four EU member states to issue a reasoned opinion in respect of the proposals. Reasoned opinions are issued by member states when they consider that draft European legislative proposals breach the principle of subsidiarity (i.e., that action should only be taken at EU level when it is more effective than EU countries acting alone at national, regional or local level).
Reasoned opinions do not restrict a member state's ability to vote in favour of a proposal. However, where reasoned opinions are issued by a number of member states, that tends to indicate that reaching unanimous consensus on the proposal may be difficult.
Reasoned opinion issued by Ireland
On May 10, the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach issued a report concluding that the proposed directives breached the principle of subsidiarity. On May 15 both houses of the Irish Parliament passed motions to issue a reasoned opinion to the European Commission. The reasoned opinion issued by Ireland raises a number of points:
- The proposals do not explicitly state the method of allocation of profits derived from the digital economy. If the allocation method is based on an apportionment formula similar to that proposed in the common consolidated corporate tax base (CCCTB) proposal or attributed to end users of online digital services, this approach will naturally favour and advantage large member states with large populations and customer bases and impact disproportionately and negatively on the finances of smaller member states;
- The EU will be acting unilaterally in proceeding to introduce proposals designed to tax the digital economy when existing international reviews are as yet not completed. Ireland specifically refers to the work of the OECD Task Force on the challenges arising from the digitalisation of the global economy in this regard. In addition, the opinion expresses concern about the development of two divergent and incompatible taxation models which have the potential to engender a two-tier system adding greater uncertainty and fragmentation;
- The digital services tax "is a blunt and crude instrument – to be derived from gross revenue that takes no account of whether a business is profitable or loss making";
- The lack of discretion afforded to member states in either increasing or decreasing the rate of the annual 3% levy raises issues concerning the legality of the digital services tax proposal and whether it is a violation of the principle of tax sovereignty; and
- The digital services tax has the potential to lead to some form of double taxation as it is not creditable against corporation tax paid.
The Netherlands, Denmark and Malta also issued reasoned opinions in respect of the proposals. The reasoned opinions did not breach the threshold of votes required to trigger the 'yellow card' procedure requiring the European Commission to review its proposals. They do, however, evidence a lack of consensus among member states on the issue.
More recently, Finland, Sweden and Denmark issued a joint statement highlighting their concerns with the proposals. In particular, they noted that the two proposals were more focused on changing the existing rules on allocating taxable income between countries and that a shift in taxation rights based on the location of the digital user was a departure from taxation principles that should be agreed at an international level.
Comment and next steps
While Ireland will continue to engage with and contribute to proposals by the EU in the area of taxation of the digital economy, it is clear that Ireland has concerns and does not support un-coordinated unilateral action on the part of the EU in this area. Ultimately, the reasoned opinion supports the work of the OECD which has, as its ultimate objective, the implementation of a new global taxation framework that has international acceptance. Ireland believes this approach offers the best way forward in formulating a global response to what is a global issue.
Coupled with the recent pronouncements from other member states, it is clear that Ireland is not alone in its concerns. The gap opening up between member states on the issue will have to be bridged if the matter of the taxation of the digital economy is to be advanced at an EU level.