Ms Anne Gunnell:

The global tax rules are strongly rooted in a physical presence that is largely determined by the permanent establishment rules. The effectiveness of existing global tax rules is challenged by the ongoing digitalisation of the economy to the extent that value creation is becoming less dependent on the physical presence of people or property. One of the key challenges is that the permanent establishment test does not reflect modern business models. Policymakers are working on the challenges and examining such issues as the collection and exploitation of data, network effects and the emergence of new business models as exacerbating the challenges to existing tax rules. New rules dealing with the taxation of modern business models will also have to address how profits are allocated, that is, how the share of multinational profits should be taxed in a given country.

The work of the OECD on the taxation of the digital economy is continuing as outlined in its interim report, Tax Challenges Arising from Digitalisation, published in March this year. It has resumed this work, including the monitoring of developments in digital technology and business models, the individual measures taken by countries to address the broader tax challenges raised by digitalisation and the extent of implementation and impact of the relevant actions from the BEPS package. In fact, Mr. David Bradbury, head of the OECD’s tax policy and statistics division, has said that everyone within the inclusive framework which is 113 countries, have all agreed that we should continue to work towards a global consensus based solution. That is the ultimate answer and unless we achieve that, it is likely that there will be a range of adverse economic consequences that will flow from unilateral measures. The best way forward is for us to move together.

In March, the European Commission also came forward with two legislative proposals to deal with challenges in taxing the digital economy, an interim and a long-term measure. In the short term, the EU proposes a digital services tax. This measure is targeted at larger digital companies that generate revenue by supplying digital services within the EU. The tax will be imposed at 3% of gross revenue, taking no account of a business' profitability or margin. Hence, a highly profitable company would get taxed at the same level as a loss-making company. The tax is focused on a small number of companies with global annual turnover exceeding €750 million. The charge is not creditable against other corporation tax paid and will therefore lead to some double taxation.

The EU also proposes a long-term comprehensive solution based on a new significant digital presence. The comprehensive solution will apply to a much wider range of companies. This comprehensive solution is expected to form part of the EU’s ambitions for a common consolidated corporate tax base, CCCTB. Our tax policy director, Ms Cora O'Brien, will now critique the proposals and examine the EU and global reaction to them.