OECD's Digital Tax Work Has Broad Ramifications For Ireland
Jason Gorringe, Tax-News.com, London
22 August, 2019
As a small open economy, Ireland may be affected significantly by the OECD's proposals to modify how taxing rights are allocated among countries, Irish business association Ibec has said.
The OECD is developing new digital tax rules that would be presented for adoption internationally at the end of 2020, which will focus on two central pillars.
First, the OECD will review existing rules that divide up among jurisdictions the right to tax the income of multinational enterprises, including traditional transfer pricing rules and the arm's length principle. It will look at how these can be modified to take into account the changes that digitalization has brought to the world economy. This will require a re-examination of the so-called "nexus" rules – namely how to determine the connection a business has with a given jurisdiction – and the rules that govern how much profit should be allocated to the business conducted there.
Under the second pillar, the BEPS Inclusive Framework countries will seek to resolve remaining BEPS issues and will explore two sets of interlocking rules, designed to give jurisdictions a remedy in cases where income is subject to no or only very low taxation. This work looks to minimize tax base erosion and profit shifting by ensuring that income is not inappropriately shifted to territories that levy no or low tax rates, by ensuring that income is subject to at least a minimum level of tax, wherever that may be.
This would involve the introduction of a new effective tax rate test, which would also enable stakeholders to better determine in a harmonized way how much tax multinationals pay internationally.
In a new report, Ibec highlighted potential risks to Ireland's tax framework, its competitiveness, and to revenue receipts. It noted that there is "clear renewed political momentum behind global multilateral tax reform through" pillar two. It said that proposals concerning "the allocation of tax bases between countries and a potential for global minimum effective corporate tax rate" will be significant for Ireland.
Ibec said that proposals under pillar one "will mean some re-allocation of taxing rights to larger importing countries and, as a small exporting country, may mean the Irish Exchequer will lose a proportion of its corporate tax base." However, it argued that the Irish business community is more concerned about the possible introduction of a global minimum effective corporate tax rate.
Ibec stressed that, were any such measure introduced, the rate would need to be "set at a level which focuses on addressing actual profit shifting concerns" and that it should not "infringe" on Ireland's "right to set competitive tax rates."
Ibec urged that Ireland needs to prepare for a post-BEPS world in which the non-tax elements of the country's business model will play a greater role in attracting investment.
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