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Ireland Sees Hope in OECD Pillar 1 Work on Digital Taxation

Posted on May 24, 2019

Minimum taxation proposals under pillar 2 of the OECD-led work on taxing digitalization are problematic for Ireland, but discussions on taxing intangibles and intellectual property under pillar 1 hold promise, Ireland’s finance minister said.

Irish Finance Minister Paschal Donohoe updated reporters May 23 on Ireland’s participation in the OECD-led work to find international consensus on a solution to adapt global tax rules for the digital age by 2020. He held the press conference after giving a speech in Dublin at the Global Tax Policy Conference, organized by the Irish Tax Institute and the Ash Center at Harvard Kennedy School.

Donohoe emphasized the appetite for change across the world after attending a May 22-23 OECD ministerial council meeting in Paris. “In the discussion . . . it is now evident to me that the will is there within the OECD and within other countries to look at what changes can be made in global tax policy, particularly with regard to the digital economy,” he said.

Ireland recognizes that it must actively participate in the ongoing negotiations to protect its national interests, such as its right to fair tax competition, Donohoe said.

The OECD inclusive framework on base erosion and profit shifting — a 129-member group of countries committed to implementing minimum BEPS project standards — is discussing several options that could form the foundation of a solution.

The four options are organized under two pillars. Under pillar 1, which focuses on profit allocation and nexus issues, there is a proposal that would give more taxing rights to user jurisdictions based on active user contribution, which the United Kingdom supports; a proposal that would give more taxing rights to market jurisdictions based on marketing intangibles, which the United States favors; and the reconsideration of nexus concepts, such as “significant economic presence,” which India wants. Proposals under pillar 2, focused on remaining BEPS issues, provide for global minimum taxation, which Germany and France favor.

Although Ireland has not explicitly expressed support for any particular option, the pillar 1 proposals may hold the most potential to find agreement, according to Donohoe.

“It’s my view that the work that is now taking place in relation to how we tax intangible and intellectual property, it may be possible in that work stream to identify a final point of agreement that will serve our national interest,” Donohoe said. “This depends on its ability to build on existing work in transfer pricing.”

Donohoe reiterated Ireland’s opposition to any kind of global minimum taxation proposal. “It’s not clear to me what is the objective of that approach,” he said, adding that the development could create additional challenges for small, open, and exporting economies.

The minister’s press conference comments doubled down on the highlights of his speech, in which he noted that a minimum effective tax proposal wasn’t originally part of the OECD debate on taxing the digital economy. “I remain to be convinced of the validity and appropriateness of this proposal in reaching an agreed outcome,” Donohoe told conference participants.

Any internationally agreed solution must meet several criteria, according to Donohoe. It must follow the principle of aligning taxing rights with value creation, be appropriately and modestly targeted so that it does not upend the existing international corporate tax framework, and be based on existing transfer pricing rules as much as possible, he said.

An agreed approach must also ensure that most profits continue to be taxable in exporting jurisdictions under current tax rules, avoid favoring large countries over smaller jurisdictions, and ensure medium-term certainty for both governments and business, according to Donohoe.

While corporation tax should be paid where value is created in line with the arm’s-length principle, countries should be open to “considering and developing a broader concept of value creation, which recognizes that some value may arise from scale, from brands, or from access to markets,” Donohoe said. “Change is coming to the international tax system, and Ireland’s engagement with this work must reflect this reality.”

Irish officials will return to Paris for the inclusive framework’s May 28-29 meeting to sign off on a plan that will guide the OECD-led work on the issue between now and the end of 2020, Donohoe said. The plan will “help to maintain the momentum of this process,” he said.

“There remains, however, a lot of work to be done before we will have a workable agreement,” Donohoe added.

The minister appealed to the audience to continue giving input as the OECD continues its work.

“It is important that whatever solution is found at the OECD must be underpinned by a sound, intellectually principled basis or it will not be defensible in the longer term,” Donohoe said. “Any solution at the OECD must be also be workable in practice. In this regard I believe that as stakeholders your input will be vital in shaping the system.”

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