By eMail to ctp.beps@oecd.org

19 December 2013

Dear Sirs

Request for input regarding work on tax challenges of the digital economy

We refer to the above titled document. We propose to address one of the questions you raise, as per below, while looking forward to the public consultation to follow in the first half of 2014.

A. Nature of work/activities undertaken by your organisation

A.1. Please describe the background of your organisation, including the nature of the work or activities performed.

This response is from a representative body.

The Consultative Committee of Accountancy Bodies – Ireland is the representative committee for the main accountancy bodies in Ireland. It comprises Chartered Accountants Ireland, the Association of Chartered Certified Accountants, the Institute of Certified Public Accountants in Ireland, and the Chartered Institute of Management Accountants, which represent a combined membership of some 40,000 accountants. Brian Keegan, Director of Taxation at Chartered Accountants Ireland (brian.keegan@charteredaccountants.ie, +353 1 6377 347) may be contacted if any further details in relation to any points made in this submission are required.

B.6. What challenges do digital economy players face in determining their tax liability from a corporate income tax and VAT/GST perspective?

We note that the Action Plan on Base Erosion and Profit Shifting does not define “Digital Economy” but instead outlines a number of characteristics appropriate to it, including:

• an unparalleled reliance on intangible assets
• the massive use of data (notably personal data)
• the widespread adoption of multi-sided business models capturing value from externalities generated by free products, and
• the difficulty of determining the jurisdiction in which value creation occurs

The Collin/Colin report¹ develops further the characteristic of the massive use of data by noting that digital economy consumers often provide free labour, perhaps by voluntarily inputting their personal data in connection with a purchase. Those authors maintain that the value of this “free labour” is not reflected in any tax system.

The principal challenge from a Corporation Tax perspective is derived from the last item on this list - to establish the country of residence of the company concerned, and hence the jurisdiction with tax charging rights. This challenge is not unique to companies within the digital economy. The thinking on this issue should not be clouded by its relative novelty. We suggest that one important facet of the work being undertaken should be to more clearly define the industries and entities involved when considering digital economy issues. There must still be recourse to the first principles of corporate residence as established by the domestic legislation of the countries concerned, Case Law, and the principles of construction of Double Taxation Agreements.

Among the established principles of Case Law are:

• Corporate residence is not always defined by the place of incorporation, but by the place of central management and control (cf De Beers Consolidated Mines v Howe, 5 TC 198)
• There is a necessary distinction drawn between the place of central management and control of a company, and the location of its day to day operations (cf American Thread Co v Joyce 6 TC 163)
• The determination of central management and control is a question of fact (cf Unit Construction Co v Bullock 38 TC 712)

As the OECD Commentary on the Model Tax Convention has it, –

• “’the place of effective management’ has been adopted as the preference criterion for persons other than individuals. The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time.²”

These principles are well established and with good reason; they have served well. In particular, for those countries which are Member States of the European Union, they have constituted a critical part of the legislative infrastructure supporting both the free movement of services and freedom of establishment within the EU. It will be recalled that the European Commission Proposal for a Council Directive on a Common Consolidated Corporate Tax Base³ sought to set many of these principles aside. At the time of writing it is unclear as to the acceptability of this Proposal, although it has been in existence for almost three years and the discussions predating it lasted for a decade before that again.

The tax challenges posed by digital economy entities may therefore not be derived from the core principles themselves, but rather how those core principles are to be applied. As far back as 1999, a position paper by the Irish Revenue Commissioners identified that the areas for examination include the concept of permanent establishment under the OECD Model Tax Convention and the characterisation of payments for digitised products. Since then, there has been much development in the thinking underlying these core concepts, both for Corporation Tax and VAT purposes. This development in thinking has to the credit of all concerned largely avoided any conflation of Corporation Tax and VAT issues; the former having mainly to do with producers, the latter to do with consumers. We would urge that these distinctions should continue to stay in sharp focus.

We suggest that a useful and pragmatic resolution of any of the ambiguities associated with the taxation of digital economy enterprises lies in the provision of guidance and consistent application of existing taxing rights principles, rather than a restructuring of the legal principles underpinning them.

Central to such guidance and application is the recognition that in reality, there is no such thing as “international tax”. Taxes are paid to the competent authority of a National Government of a State by reference to the amounts which are subject to the taxing rights of that State, and levied at the rates charged by the State. Taxing rights are, in the vast majority of the developed countries, governed by the bilateral Double Tax Conventions and the majority of such Conventions are derived from the OECD model.

Yours faithfully

Paul Dillon, Chairman, CCAB-I Tax Committee

Source: Chartered Accountants Ireland.www.charteredaccountants.ie

1. Collin, P; Colin N Task Force on Taxation of the Digital Economy Paris, 2013

2. Commentary on Article 4, at para. 24

3. COM(2011) 121/4