Mr. Sorley McCaughey:

Good morning. I am the head of advocacy and policy at Christian Aid Ireland. I am here with Mr. Mike Lewis, who has been working with us recently on a consultancy basis and was the principle author of the Christian Aid report on the impact of Ireland’s tax policy on developing countries, entitled Not Without Cost, which I think the members all have a copy of. We have been working on the issue of tax justice since 2007, when we became the first development NGO to identify tax as a development issue and as a justice issue. As such, we are principally concerned with the erosion of the tax base in the world’s poorest countries. It is estimated by the IMF that developing countries lose up to $150 billion per year to multinational tax avoidance.

We appreciate the opportunity to appear before the committee. I thank the Chair and members for the invitation. The countries where we work and where Irish aid is spent are not only among the world’s most rapidly growing markets for digital services due to their lower levels of penetration compared to Europe and North America, they are also now the primary target markets for Facebook, Google and other similar companies. Indeed, in many developing countries, social media companies such as Facebook have the ambition to "be" the Internet. Therefore, to the extent that all economic activities increasingly incorporate online activities, what we do now to tax digital economic activities may safeguard or undermine developing countries’ tax bases long into the future.

As a result, we welcome the ambition of the EU and other entities to explore new solutions for taxing digital economic activity. However, our research, including the papers we published last November on the global impact of Ireland’s tax system, suggests that the problems of taxing digital activities in developing countries are wider than the dysfunctions the new EU proposals are designed to address. The evidence we present today argues that the EU proposals, both interim and final, can only be part of the solution. We want to talk briefly about possible limits to their technical scope, practical efficacy and international impact. We end by suggesting that there are wider proposals being developed elsewhere, including in the EU but also in the OECD and at the UN, which would provide some more systemic solutions.

On the technical scope, the EU's digital economy proposals are effectively focused on only one part of that economy, namely, providing digital services such as online advertising, software or access to online content in a country without having a taxable presence in that country. They will not deal with a much more pervasive area of activity, which is the way that online or digitally-facilitated sales mean that non-digital goods and services can be sold in a particular country and the sales booked in a low-tax jurisdiction. The first problem is really a subset of the second. As our report, Impossible Structures, showed, whether one is selling subscriptions to the LinkedIn website or physical Microsoft mobile phones designed for developing countries, in a digitised economy one can sell both through a booking centre in a low-tax jurisdiction without the need for a taxable bricks and mortar presence in the country where one's customers are based. Both online services and sales of physical goods can use the famous double Irish and single malt structures that we highlighted to shift profits and avoid having a taxable bricks and mortar permanent establishment in the country where the users or customers are based. The EU proposal therefore introduces a narrow solution for taxing profits from sales of digital services when other goods and services can use many of the same mechanisms to avoid tax and will not be covered by the Commission’s proposals. Indeed the proposals explicitly state that “the mere sale of goods or services facilitated by using the internet or an electronic network is not regarded as a [taxable] digital service.”

Looking at the practical efficacy of the proposals, our November report highlighted how many of the structures used to avoid a taxable presence, a permanent establishment where goods and services are sold - which is really the overarching problem we are talking about here - rely upon the standard terms of double tax treaties governing what constitutes a taxable permanent establishment and how profits should be attributed to it. The Commission’s proposals explicitly acknowledge that they cannot apply in situations where sales are being booked in a jurisdiction which has a double tax treaty with the country where the users or customers are present. Most of the jurisdictions we are talking about, including Ireland, Luxembourg and others, enjoy wide treaty networks, certainly with all other EU member states and, increasingly, with developing countries. In other words, even if developing countries were to adopt the kinds of solutions described in the EU proposals, they would also come up against this problem.

Finally, on the international impact, the obstacle of double tax treaties highlights the fact that even were the EU proposals to be adopted, and adopted more widely than the EU, they will come up against dysfunctions of wider international tax standards. These are being looked at by several different entities including the UN tax committee, international bodies such as the Independent Commission for the Reform of International Corporate Taxation, ICRICT, and, of course, the OECD. Although the excludes most developing countries from any real decision-making, it has nonetheless produced proposals that include useful measures with a fairly wide degree of support from some of the key jurisdictions currently used by Facebook, Google and many others to avoid a taxable sales presence around the world. We believe, therefore, that the wider problem we have described, that is, the avoidance of a taxable presence when making sales of both digital and non-digital goods and services, will ultimately be tackled by fundamental root-and-branch change such as unitary taxation systems, if properly designed.

We also believe, however, that there are aspects of the OECD’s BEPS package that might help with this wider problem in the meantime. For developing countries, it is of concern that a global booking centre like Ireland, despite its vocal support for the OECD as the forum for international tax reform, is still not signed up to implement this package in full. It is particularly relevant to the problems we are talking about today that Ireland is still reserving its position on Article 12 of the OECD multilateral instrument, which is designed to tackle precisely the avoidance of a taxable presence we have been describing. Furthermore, Ireland’s transfer pricing rules, which determine how profits are to be shared between centres of intangible assets or sales booking centres such as Ireland and places where sales are actually made, are still based on the OECD’s 2010 version and have not been amended to take account of the latest OECD recommendations. Neither of these is a panacea but both are things that are within Ireland’s powers to do right now. They are consonant with this Government’s commitments and stated preference to implement the OECD’s recommendations and would go some way towards tackling the kinds of wider permanent establishment avoidance problems with which the EU’s digital economy proposals will not and cannot deal.