47 – 49 Pearse Street, Dublin 2, IRELAND
OECD BEPS Project
2, rue André Pascal
75775 Paris Cedex 16
France

By eMail to ctp.beps@oecd.org

14 April 2014

Dear Sirs

Comments On Discussion Draft On Action 1 (The Tax Challenges Of The Digital Economy) Of The Beps Action Plan

We refer to the above titled document.

We note the request for comments here of the Discussion Draft. In the time available, it is not possible to address all of the issues identified in the request for comments, nor indeed to comment in adequate detail on all the points raised. It is highly unsatisfactory that such a short timeframe be allowed for analysis and comment on a document of this complexity with such potentially far-reaching consequences. We are therefore limiting our comments on this occasion to certain key observations.

General Observations

1. It might have been expected that the proposals would seek to address the more controversial types of tax planning noted in the public domain by some multi-nationals. However it seems to us that the proposals go much further. If followed through they could result in a fundamental change to the business model for many companies, major multinationals and smaller indigenous exporters of digital products and services alike.
2. The most challenging proposals are those which involve a redefinition of the current Permanent Establishment concept, for example the introduction of a “virtual” permanent establishment. The consequences would be that for income tax purposes, the recognition of company profits would move away from where value is actually created to the locations where products are sold or consumed. This is a fundamental revision which seems at odds with the objectives of other Plan Actions which seek to align the location of profits with value creating activities. For reasons which are explored further below, we consider that the better approach for businesses which have no physical presence in the consumer market would be to retain income tax source taxation with destination based VAT/ consumption taxes. This would seem to us to pose least risk of developing proposals which cause double taxation and of creating a barrier to flows of international trade.
3. There are echoes of the thinking described at Point 2. above behind concepts in the OECD discussion draft pursuant to Action 6 (Prevent Treaty Abuse). Such proposals, when viewed alongside proposals for Limitation of Benefits tests which focus on local ownership would severely prejudice international trade. Companies operating in economies with large volumes of international trade go beyond their geographical bounds to source both markets and capital. The ownership restriction as described in the Action 6 discussion draft is only workable with considerable derogations and exclusions so as not to be detrimental to international trade. Similarly, in the case of the digital economy proposals, care must be taken that any measure does not create a barrier to international trade. This is especially the case for the digital economy which offers such exciting opportunities for growth in international trade.
4. We are not convinced that digital economy companies should be taxed differently, and we see this as a departure from the Ottawa principles. Based on the findings presented in the draft in the report, it seems to us that most businesses are now digital economy companies at least to some extent, as they advertise and take orders online etc. It can be anticipated from the trends described in the draft report that the extent of permeation of the digital economy throughout all business sectors will only grow.
5. Many Irish accountants are concerned with commercial issues on an all island of Ireland basis, dealing with both the Irish and UK tax jurisdictions. Both Ireland and the UK are major exporters of information and communication technologies. From the figures published in your discussion draft, the exports by these two countries in the sector constitute almost 20% of the world market. The proposals in your discussion draft are therefore of considerable concern to us. In our view, they would of themselves distort and potentially erode the existing tax base of both countries. The proposals would similarly prejudice other countries with similar sectoral profiles – a significant export presence and a relatively small domestic market.

Specifc Comments

The discussion draft invited comments on a number of particular issues which it had addressed.

Whether it is possible to ring-fence the digital economy from the rest of the economy, and if not, whether specific types of digital transactions could be identified and addressed through specific rules;

taken with

Whether the Ottawa taxation framework principles identified above are an appropriate framework for analysing options to address the tax challenges, and whether and how they should be supplemented.

The discussion draft reflects the emphasis placed by the Task Force on the conclusions of the 1998 Ottawa conference:

The Task Force considers that these principles are still relevant today and, supplemented as necessary, can constitute the basis to evaluate options to address the tax challenges of the digital economy.

(at paragraph 7 here)

However, there may be an important omission from these principles as quoted in the discussion draft. The full text of the taxation principles as agreed as Ottawa reads as follows:

• The same principles that governments apply to taxation of conventional commerce should equally apply to e-commerce, namely: [Neutrality, Effciency etc as recited at Box 1]¹

The Ottawa Ministerial Conference in 1998 therefore seems to have dismissed the drawing of any distinctions between conventional commerce and e-commerce. As the ministers put it –

• Government intervention, when required, should be proportionate, transparent, consistent and predictable, as well as technologically neutral²

Of course time has elapsed since then. For all the forward thinking evidenced in 1998 by the Ottawa participants, it is unlikely that they foresaw the extent to which e-commerce would develop in the following 15 years. We consider that the draft report, having taken as its starting point the Ottawa principles, should equally reflect the key agreement that there be no distinction between conventional commerce and e-commerce. We do not think that the findings set out in the report present a convincing case for drawing a distinction between those businesses that are heavily reliant on the digital economy and other business sectors.

This viewpoint was also expressed by us in our contribution to this process by letter of 19 December 2013. One important facet of the work being undertaken should be to define more clearly the industries and entities involved when considering digital economy issues. It is apparent that there has been a coherent attempt in the discussion draft to better analyse digital economy issues, which we acknowledge. However, we also pointed out the importance of the first principles of taxation. It seems that this concern was an important outcome of the Ottawa conference and should be re-emphasised in the final version of the report.

As identified in the discussion draft, there are many ways in which businesses can engage in e-commerce activities. In practice, it is by now unlikely that a sensible distinction can be drawn between digital economy business and what the Ottawa Conference termed conventional commerce. If this distinction is pursued, the inevitable outcome is that many businesses will suffer a compliance burden under two separate tax regimes – one applicable to their digital economy activities, and another to everything else. This would surely be inefficient for businesses and Revenue Authorities alike and must serve to damage international trade.

The ability of the measures developed in the course of the BEPS Project and the current work on VAT/GST to address BEPS concerns in the digital economy;

The BEPS Action Plan mandated work “to ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services.”

VAT and GST are taxes on consumption. For EU VAT purposes, taxes are levied in the country as specified by the EU VAT directive depending on the nature of the supply, and the nature of the supplier and the receiver (B2B, B2C etc). Short of relocating its consumers or changing the nature of its goods and services, it is impossible for a business to erode the VAT base. Often neither such actions are practical. We note in particular the recent EU initiatives in connection with the Mini One Stop Shop (MOSS) which we are confident should serve to eliminate one of the last remaining barriers in establishing an efficient mechanism for the collection of VAT at the point of consumption.

It is important to recognise the distinction between ineffective consumption tax legislation, and ineffective consumption tax collection mechanisms. There can be a risk that overly onerous direct and indirect tax measures will simply mask, or attempt to make redress for, deficiencies in collection mechanisms at the point of sale to the consumer.

The options to address these broader tax challenges discussed by the Task Force and summarised in the discussion draft;

We have considered options advanced at Paragraphs 211, 212 and 217.

Paragraph 211

The revision to the exclusions in the definition of permanent establishment would mean that having a storage facility for stock, or a purchasing division, or an advertising and research department in a country would make the company liable for tax in that country.

Paragraph 212

A “dematerialised digital activity” where digital services are provided, contracts are concluded on-line, payments are made electronically and the customer is indifferent to the location of the supplier could be deemed taxable in the location of the customer. This is a proposal for little other than a consumption tax framed as a direct tax. It poses a real risk of double taxation.

Paragraph 217

A “virtual permanent establishment” – where services are provided and contracts concluded remotely could be deemed taxable in the location of the customer.

All of these proposals are unacceptable as they represent a fundamental change to taxation of the profits of companies by aligning the taxation of company profits away from where value is created to locations where products are sold. We consider that the best model to promote and support international trade remains a combination of income source taxation with destination based sales and consumption taxes. This appears to present the least risk of double taxation and of adding more complexity and uncertainty that could hinder business taking advantage of the opportunities for growth which are afforded by developments in the digital economy.

Closing Comments

You may wish to note that 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 this letter are required.

We have already offered observations, as noted earlier, in our letter of 19 December 2013, and in our letter to your colleagues of 9 April 2014 in the context of BEPS Action 6.

Yours faithfully

Paul Dillon, Chairman, CCAB-I Tax Committee

Source: Chartered Accountants Ireland. www.charteredaccountants.ie

1Implementing the Ottawa Taxation Framework Conditions 2001, OECD 2001, ISBN 92-64-18595-X at Page 10

2At page 5 of Ottawa conference conclusions – SG/EC(98)14/FINAL