Ireland could lose up to €160m a year in corporation tax if EC proposal becomes law

The Revenue Commissioners estimate that Ireland stands to lose between €120m and €160m a year in corporation tax revenue, if a European Commission proposal for a digital turnover tax becomes law.

The measure, which was formally tabled by the Commission in March, calls for all member states to impose a 3% levy on the turnover of large digital companies.

It says the measure would raise revenue of €5bn a year, to be divided among the 28 EU member states.

Officials from the Revenue Commissioners told the Oireachtas Finance Committee that by a rough estimate, based on dividing the €bn by Ireland's share of the EU population, 0.9%, the State could gain around €45m in new revenue from the turnover tax.

However, the draft directive says the money paid in turnover tax could be deducted from each companies corporation tax bill.

As many of the large internet "giants" such as Facebook and Google have their European headquarters in Ireland, they could offset the 3% levy against corporation tax they pay here.

Based on its own assessment of sales by the top ten digital companies in Ireland, the Revenue Commissioners think the proposal could result in a reduction in the amount of corporation tax paid of between €120m and €160m a year.

Revenue officials explained that, because the European Commission has not published the detail of how it arrived at the estimated revenue sum of €5bn for the whole EU, they had to make up their own best estimates, based on Irish revenue figures.

They said that the top 20 Irish digital companies had combined EU sales of €56 billion.

95% of that sum was attributed to the top ten companies.

The Revenue Commissioners say that only the companies themselves have enough information to know to what extent their revenues fall within the terms of the Digital Sales Tax (DST).

But, if 60%-80% of their sales are liable for DST, then the Revenue Commissioners estimate figures of €120m-€160m being potentially deductable against corproation tax due in Ireland.

They add that this may well be an undershoot of the amount of tax that may be lost as a result of the proposal. Nor does it take account of the cost of collecting the tax.

The European Commission recommends that money raised by DST would be deductable against Corporate Income Tax.

However the draft directive does not make this a binding requirement.

Because of the imprecision involved in estimating both the revenue gains and losses of the DST, the Revenue Commisioners staff were unwilling to net off one aginst the other, when questioned by members of the committee.

The officials said the European Commission has estimated the adminstration costs of collecting the new tax at about €2.5m a year per member state.

Based on their own experience in setting up the VAT MOSS (mini-one stop shop) - a system by which VAT due across the EU can be collected in a single member state, which then distrubutes the revenue across the other member states - the Revenue Commissioners think the EU estimate is accurate.

The VAT MOSS system here cost €2.1m to set up, and has an annual running cost of around €100,000.

Under the proposal, the Digital Sales Tax would apply to internet companies that extract value fom users of their service in any one of three ways: sales of advertising, digital marketplaces that charge a commission to buyers and sellers, and revenue form selling data harvested from users.

The Digital Sales Tax, sometimes referrred to as the interim measure, is designed to be a quick to implement measure to tax part of the digital economy.

A second, long-term measure has also been proposed by the Commission - to establish a right to tax a company based on its digital "presence" rather than its physical presence - which is the basis of existing tax law.

Proponents of the measures say the evolution of digital companies over the past 20 years means existing tax law has to change to keep pace with technological developments.

A separate set of proposals are being developed by the Organisation for Economic Co-operation and Development (OECD), but its head of tax policy Pascal Saint-Amans said recently there has been little progress in developing a consensus on the issue.

The OECD is due to produce a proposal for refom of tax law to cover digital companies in 2020.

Ireland has led political oppoosition to the interim measure, in particular at EU level.

It argues that the OECD is the best forum for bringing about global tax reform, rather than a regional body like the EU going it alone.

The Irish government claims smaller EU states are turning against the interim measure as they begin to calculate their own revenue losses from the measure, which it says will benefit the bigger states, as they have the biggest populations.